1 Table of Contents Introduction Chapter 1: The Economic Problem Chapter 2: Demand and Supply Chapter 3: Elasticity Chapter 4: Costs of Production Chapter 5: Perfect Competition Chapter 6: Monopoly and Imperfect Competition Chapter 7: Economic Welfare and Income Distribution Chapter 8: Measures of Economic Activity Chapter 9: Inflation and Unemployment Chapter 10: Economic Fluctuations Chapter 11: Fiscal Policy Chapter 12: Money Chapter 13: Monetary Policy Chapter 14: The Foreign Sector Chapter 15: Foreign Trade 2 INTRODUCTIO N This manual proceeds chapter by chapter, providing useful teaching tips, answers to all problems and quest ions found in the book, and answers to all internet application questions and simulations found online. In addition, this introduction summarizes the various learning features of Understanding Economics: A Contemporary Perspective and provides an annotated list of the book’s supplementary art icles . Special F eatures of the Text Instructors will note that virtually all graphs in the text incorporate numbers rather than abstract mathematical terminology. A majority of graphs are also accompanied by tables to clarify the way that graphs are plotted. The u se of formulas is kept to a minimum. E ach formula that does appear is accompa nied by a numerical example . Identifiable features of the text include: - Practice Problems These appear at the end of each chapter section , with each section tied to a set learning objective. A ll problem answers are autogradable an d appear both in the Connect resource and in this manual. - End of Chapter Problems and Questions The assessment section at the end of each chapter includes autogradable problems as well as essay - style instructor - graded questions . Answer s appe ar i n Connect as well as in this manual. - Advancing Economic Thought Each chapter includes an articles that highlight a renowned economist and the ideas that made them famous . Summaries of these articles appear in the annotated list at the end of this introduction. - Sideline article s accompany some of the chapters , each highlight ing a p articular contemporary issue . Several appear at the e nd of text chapters while o thers are accessible through imbedded links i n the eBook . Summaries appear in the annotated list at the end of this introduction. - Economics as a Second Language is a series of highlighted text passages that focus on the interpretation of economic terms, and how their application in economics differs from common usage. - Thinking About Economics Over forty points of discussion appear in a question - and - answer format through out the text. Answers appear in Connect. Online Learning Aids The Connect resource provides instructo rs a wide range of learnin g and assessment opportunities. It includes the following features: - Answers to all practice problems, end of chapter problems and end of chapter questions. The answers for problems are autogradable, for questions they are instructor - graded . Some problems are available in algorithmic format to enhance their usefulness in a variety of assessment contexts. - Imbedded v ideos in the feedback for a few key problems . The se videos highlight graph s and their application . - Classroom s imulations for each chapter. These are designed to i nvolve the whole class in activity - based learning. A utogradable problems and instructor - graded questions are included . T he full simulations , including problem and question answers, also appear in this m anual. - Internet Application Problems and Internet Application Questions . The problems are autogradable and the questions are instructor - graded. These give students the chance to acce ss online data , and are also found in this manual. 3 - A Skills Resource and a Graphing Module . These provide students with the opportunity to solidify basic skills , especially graphing skills, essential in learning economics. T eaching Order of Material Time considerations may mean that instructors feel the need to skip portions of the text . T hey may also wish to treat subjects in an order different from the text’ s sequence . The book has been structured to enable some of the most popular reordering strategies : - M acroeconomic topics in Parts 3 and 4 may be introduced directly after the introductory topics in Chapters 1 and 2, and before the discussion of microeconomics in Chapter 3 and Part 2. - Discussions of the foreign sector in Chapter 14 and foreign trade in Chapter 15 may be treated in rev erse order, or one chapter may be covered without covering the other . - Instructors who wish to omit the details of profit - maximization in the four market structures can do so by covering only the first section in Chapter 5. - Instructors who wish to deal with the money market and the determination of interest rates before their treatment of public debt and deficits can cover Chapter 12 before returning to the material in the Sideline article Mountain or Mirage , which appears at the end of the previous chapter. Instructor Aids Two aids are available in addition to this manual: - A series of animated Microsoft PowerPoint Presentations accompanies the text. These presentations highlight the logical structure of each chapter for lecture purposes. - The Computerized Test Bank provides multiple choice questions and answers for each chapter, categorized by topic , learning objective and level of difficulty. Range of Supplementary Articles A total of 18 articles appear in the text and another four in Connect. All include either autogradable problems or instructor - marked questions for assessment purposes . - Each chapter contains at least one article in t he Advancing Economic Thought , its focus linked to the content of the chapter. Many of these articles have been composed for the text. A few are excerpts from the thinkers’ own writings or articles from secondary sources. Balance between Contemporary and Historical Thinkers Approximately half of the thinkers in the Advancing Economic Thought series are contemporary and half are historical. A rough chronological sequence has been maintained in the ordering of the series . Thinkers from the past are dealt with primarily in the first half of the book, while present - day thinkers dominate the last half. Variety of Approaches Thinkers in the Advancing Economic Thought series can be classified as either supporters or critics of the types of methodology found in mainstream economic theory. In the selection of these highlighted thinkers, care has been taken to provide both mainst ream and alternative viewpoints. 4 Contemporary Issues Throughout the text and supplementary material, present - day issues are emphasized. Four issues are underscored throughout the text. - The New Global Economy Technological chang e and globalization are the catchwords of many economic and political commentators . The impact of technology on economic growth is dealt with in the new growth theory of Paul Romer, discussed in Making An Economy Grow (Chapter 10), and the theories of Jane Jacobs, discussed in Cities, Creativity and Diversity (Chapter 14). Globalization is defined and its current and projected effects illustrated in Chapter 15 . Finally some of the likely effects of the 2008 financial crisis on globalization are analyzed in A Crisis Too Far (Chapter 1 3 ). - The Role of Government What can a young person today expect from governments in the future? General issues relating to government's role are outlined in Chapter . More specific aspects are covered in The Games People Play (Chapter 6) . Aspects of the macroeconomic role of government are addressed in Chapters 11 and 13, in Economist Extraordinaire (Chapter 11), Mountain or Mirage? (Chapter 1 1 ) as well as Breaking the Mould (Chapter 13) . - Labour Market Trends For most students, the economic issue that dominates all others is the choice of a career. Current trends in labour markets are dealt with in Chapter 7. In Boom, Bust & Echo (Chapter 9), David Foot discusses how the career prospects of young people today are affected by demographic factors . Brave New World (Chapter 15) highlights how Tyler Cowen’s predictions on the digital revolution will affect the outlook in particular occupations. In From Course to Care e r (Chapter 9 , eBook and Connect ) C anadian evidence for the value of education, unemployment and labour demand for recent graduates is explored in a range of occupations and sectors. - Environment In Chapter 1, environmental sustainability as a major economic goal is introduced. In Chapter 7, the concept of spillover costs is applied to environmental concern, helping to show exactly how governments can intervene in markets to help meet the goal of sustainability. Meanwhile Global Conundrum (Chapter 7 , eBook and Connect ) focuses on the trade - offs between economic growth and the risk of climate change, and also describes some o f the policy options that could help reduce global carbon emissions as global per capita incomes rise. 5 INDEX OF SUPPLEMENTARY ARTICLES Advancing Economic Thought (new articles in this edition marked with an asterisk) Chapter 1 The Founder of Modern Economics introduces Adam Smith’ s concepts of the i nvisible hand and laissez faire. It shows how he used these concepts to just ify private markets. Chapter 2 Spoilt for Choice provides a quantitative trea tment of William Stanley Jevons’ model of utility maximization based on the law of diminishi ng marginal utility. Chapter 3 Prophet of Capitalism's Doom provides a quantitative treatment of Karl Marx’ s th eory of capitalist exploitation. I t also discusses the impact of this theory on later socialist thinking. Chapter 4 Critic of the Modern Corporation introduces the basics of corporate financing and analyses John Kenneth Galbraith’ s theory concerning the separation of ownership and control in most modern corporations. Chapter 5 Can Capitalism Survive? outlines Joseph Schumpeter’ s conception of the role of the entrepreneur in capitalist economies and his pessimistic view of the f uture of capitalism. Chapter 6 The Games People Play introduces the contributions that contemporary economist Thomas Schelling has made in the applica tion of Game Theory. Chapter 7 The Doomsday Prophet outlines Thomas Malthus’ s theory of population growth and the significance of this theory, both in his own day and in ours. Chapter 8 Adding the Human Dimension discusses the work of Mahbub ul Haq at the United Nations Development Programme in creating the H uman Development Index. Chapter 9 Boom, Bust & Echo summarizes David Foot’ s use of demographic theory to explain recent social and economic trends and to make predictions for the future. (excerpts from Foot and Stoffman, Boom, Bust & Echo ) Chapter 10 Making An Economy Grow discusses the ‘new growth theory’ of Paul Romer, which focuses on how technological change is an integral part of the process of economic growth. (article from Canadian Banker ) Chapter 11 Economist Extraordinaire provides a theoretical analysis of the contributions that John Maynard Keynes made to the study of macroeconomics. I t also outlines the impact he has had on policy - making since t he Great Depression. Chapter 12 Money Matters summarizes the reasoning used by Milton Friedman to explain how capitalist economies are self - stabiliz ing in the long run. * Chapter 13 Breaking the Mould looks at the career of Canada’s most famous central banker, Mark Carney, and the way he has combined oversight of monetary policy, first in Canada and now in the United Kingdom, with a prominent role in international efforts to improve financial regulation. Chapter 14 Cities, Creativity and Diversity gives an overview of the far - reaching theories of Canadian thinker Jane Jacobs, both her analysis of the role of cities in economic development and her innovative interpretation of the ethical dimensions of economic behaviour. * Chapter 15 Brave New World outlines the predictions of Tyler Cowen on the extent to which the digital revolution will keep on powerfully transforming economic activity, especially in relation to labour markets in countries such as Canada. 6 Appendices and Sidelines (new articles in this edition marked with an asterisk) The introductory Skills Resource and Graphing Module (Connect ) review the use and interpretation of equations, graphs and tables. They also covers the basic skills of critical thinking and ways to apply these skills in research and presentations. Students learn to detect and evaluate assumptions and value judgements found in economic argu ments. The Skills Resource also deals with the use of the Internet as a research tool . * Chapter 1 Share and Share Alike ( eBook and Connect ) Sharing goods and services has always been a part of informal economic activity. B ut with the rise of the internet the phenomenon has expanded in new and innovative ways. This article looks at the opportunities and challenges associated with this phenom enon and the potential for the sharing economy to become a third mode of production distinguished both from the private and public sectors, which ultimately could make it a key facet of future economic activity . Chapter 5 How Resource Markets Operate (text) introduces marginal productivity theory and illustrates the way it can be applied in perfectly competi tive labour markets. * Chapter 7: The Wealthy and the Rest ( eBook and Connect) T he top one percent of income earners and the growing economic gap that separates them from the other 99 percent of income earners ha s been the object of much discussion in recent years . This article looks at this growing gap based on the influential theories of French economist Thomas Piketty . * Chapter 7 Global Conundrum ( eBook and Connect) asks whether economic growth continue to be pursued if full account is taken of the threat of climate change. If not, what are the options for economies such as Canada? The article then looks at the theoretical distinction between the two most influential policies: carbon taxes and cap - and - trade systems. * Chapter 9 From Course to Career ( eBook and Connect) To what extent is there a mismatch of skills between those needed by employers and those possessed by young job seeke rs? This article looks at the Canadian evidence for unemployment and labour demand for recent graduates in a range of occupations and sectors. Chapter 11 Mountain or Mirage? (text) presents the debate over the possible costs and benefits of the recent rapid growth in Canad ian government debt. * Chapter 13 A Crisis Too Far (text) deals with the 2008 meltdown and its causes, including the role of speculative bubbles and derivatives, and potential lessons to economists and policy - makers . 1 - 1 Chapter 1 Teaching Tips An Example from Behavioural Economics B ehavioural economics in a text footnote . I nstruct o rs may wish to give an illustration of the types of irrational behaviour highlighted in this emerging field of study . One of the best - known is the endowment effect . This refers to the fact that people value an item they own more highly than the exact same item when they do not own it. In other words, the mere fact of ownership raises one's utility from an item , which is a sign of irrationality . Distinguishing Among Resources The definitions of natural, capital and human resources seem straightforward but can be challenging in practice . The fuzziest boundaries are between natural and capital resources and between labour and entrepreneurship. Natural and Capital Resources N atural resources are defined as gifts of nature while capital resources are the processed materials , equipment , and buildings used in produ ction. In some real - world cases the distinction between th ese two definitions is not immediately clear. Consider the case of livesto ck farm ing. T he animals used in this industry might be viewed as natural resources, given that the se animals are pa rt of nature. However, g iven the intensive tending they require -- not least in terms of daily food required to prepare th em for market -- the y are a capit al resource. In other words, animal husbandry is a form of production processing. Labour and Entrepreneurship The distinction between these two types of hum an resources is hardest for entrepreneurs themselves when trying to categorize the time they put into a business. These individuals tend to expend large amount of time in human effort (i.e. labour) as well as engaging in initiative and risk - takin g. In practice, apportioning the business's net revenues into wages from labour and pro fit from risk - taking is extremely hard. Extensions of the Production Possibilities Model The production possibilities model can be extende d in two main ways. Constant - Cost Production Possibilities The text's treatment focuses on an economy subject to the law of increasing cost s, which causes the production possibilities curve to bow out from the origin. It is also possible to sketch out the case where resources are perfectly transferable between production of the two items and constant cos ts apply. As shown in Practice Problem 2 at the end of chapter section 1.2, the production possibilities curve in this case is a downward - sloping straight line. Asymmetric Growth The text's treatment of economic growth stresses the case where an economy's ability to produce each item on the graph's axes increases by the same extent. It is possible this assumption is not met. As shown in problem 10 at the end of t he chapter, it may be that there is an increase in the economy's ability to produce only one of the items on the axes. In this case the economy's production possibilities curve rotates around either the intercept on the horizontal or vertical axis, rather t han shifting out in a parallel fashion. Share and Share Alike Sharing goods and services has always been a part of informal economic activity. But with the rise of the internet the phenomenon has expanded in new and innovative ways. The eBook article Share and Share Alike included in Chapter 1 looks at the opportunities and challenges associated with this phenomenon and the potential for the sharing economy to become a third mode of production distinguished both from the private and public sectors, which ultimately could make it a key facet of f uture economic activity , and therefore provides a possible update to the three sectors shown in Figure 1.4 . Answers to Thinking About Economics Question s Page 3: At one time, communist countries, such as China, tried to persuade their citizens to reduce their selfish material wants. However, such attempts to change mass behaviour were not successful, and have now la rgely ended in these countries. Page 8 : Charitable organizations use such strategies as public acknowledgement of donors. For example, charitable performance companies often list the names of donors i n their show programs. Page 12: The information revolution seems to have had some impact on rates of economic growth in industrialized countries. For example, between 1995 and the 2008 credit meltdown, growth rates in countries such as Canada and the United States were highe r than in the immediately preceding period. Many economists suggested that the increased use of computer - based technology was one important reason for this improved growth performance. 1 - 2 Answers to Chapter Problems 1 .1 Practice Problems 1. a. The smoker is not behaving rationally because of a physical addiction that has led them to continue engaging in an a ction they wish to stop. b. By providing themselves with small rewards for abstaining from smoking, and penalizing themselves when they do smoke, the smoker is much more likely to be able to quit. 2. a. The two variables are (i) the economic welfare of the country ' s citizens, and (ii) the quantity of the country ' s resources. The quantity of the country ' s resources is the independent variable (since it is the cause) and the economic welfare of the country ' s citizens is the dependent variable (since it is the effect). b. The relationship is direct because a movement in the independent variable ' s value leads to a movement of the dependent variable ' s value in the same direction. c. The statement is positive, since it is a description of reality that does not depend on value judgments. d. For the country described in the statement the economic problem of scarcity has become more severe since its citizens must make do with fewer economic resources than previously. 3. Rent is a payment to owners of natural resources, interest is paid to owners of capital resources, and human resources receiv e wages for their labour and profit for their entrepreneurship. A loan repayment is not a resource income because loans are not an economic resource. (R ecall that interest on a loan can be a resource income . B ut repayment of the principle is not income.) 1.2 Practice Problems 1. a. The opportunity cost of the first fish is 4 coconuts, since coconut production is reduced from 24 to 20 when the first fish i s caught. Similarly, the opportunity costs of the second and third fish are 8 (= 20 - 12) and 12 (= 12 - 0) coconuts. b. These results conform with the law of increasing opportunity costs, because as fish production is increased so does the opportunity cost of each newly caught fish. c. The curve bows out to the right, reflecting the law of increasing opportunity costs. d. Besides the assumption that only two goods are produced, we must assume that the quantity of the castaway's resources and the technology he uses are fixed, and that his resources are employed to their full capacity. e. With 12 instead of eight hours of labour devoted each day to acquiring coconuts and fish, the castaway's production possibilities curve shifts outwards, with both its vertical and horizontal intercepts increasing. If there are six instead of eight hours de voted each day by the castaway, the production possibilities curve shifts inwards. f. With a new capital asset that can be used to acquire fish (a fishing rod), the castaway's production possibilities curve shif ts outwards, with its horizontal or fish intercept (but not its vertical coconut intercept) increasing. 2. a. Hotdog production falls from 300 to 250 hotdogs as the first smartphone is produced while moving from point A to B. The opportunity cost of this first smartphone is therefore 50 (= 300 - 250) hotdogs. Similarly, the opportunity costs of the second and t hird smartphones are 100 (= 250 - 150) and 150 (= 150 - 0) hotdogs. b. These results illustrate the law of increasing opportunity costs, because each new smartphone that is produced has a highe r opportunity cost than the one before. 3. In the case of constant costs the production possibilities curve will be a downward - sloping straight line. Because the slope of the production possibilities curve is based on the two products' opportunity costs, if both these opportunity costs are constant then the slope of the production possibilities curve will be constant as well. 1 - 3 1.3 Practice Problems 1. a. Beta is likely to have more economic freedom, given the greater importance of Beta's private sector and the co nsumer sovereignty it promotes. b. Alpha is likely to have more economic stability, because of the relative importance of its traditional and public sectors. Both of these sectors tend to reduce economic instability. c. In Alpha, traditional culture and national planners are more likely to conflict, given its relatively large traditional and public sectors. d. In terms of this triangle, Alpha will be southeast of Beta because it has stronger elements of both a traditional economy and a command economy. 2. As expanding employment tends to push up economic growth at the same time as it stimulates inflation, government policies tha t promote economic growth will tend to lessen price stability. That means economic growth and price stability tend to be conflictin g goals. End of Chapter Problems 1. a. Paying $10 per visit is most logical. Given your past behaviour of not always following through with your plans, there is a good chance that you will not increase your visits to the gym. Therefore the cost of the $60 monthly contract is likely to be more than the cost of visiting the club two or three times a month at $10 per visit - $60 per month is greater than $20 or $30. b. Your past behaviour is an important factor. If you could be sure that you would follow through with your plans, the $60 pe r month might be less than the monthly cost of $10 per visit . 1 - 4 2. a. The main indication that your friend is not behaving rationally is that by making impulse purchases that exhaust his month ly paycheque he is unable to meet a goal he has already set himself. b. By setting up a separate savings plan with automatic withdrawal as soon as his paycheque is deposited in his account, he i s less likely to engage in impulse purchases that would otherwise use up these funds. 3. a. The two variables are the price of digitally streamed music and the quantity of CDs purchased. The price of digitally streame d music is the independent variable, since it is the cause, and the quantity of CDs purchased is the dependent variable, since it i s the effect. b. The two variables are Canadian household incomes and transfer payments to households. Canadian household incomes is the independent variable, since it is the cause, and transfer payments to households is the dependent va riable, since it is the effect. c. The two variables are the average salary of computer programmers and the number of people seeking a career in computer programming. The average salary of computer programmers is the independent variable, since it is the cause, and the number of people seek ing a career in computer programming is the dependent va riable, since it is the effect. d. The two variables are the price of wheat fertilizer and the amount of wheat planted by farmers. The price of wheat fertilizer is the independent variable, since it is the cause, and the amount of wheat planted by farmers is the dependent va riable, since it is the effect. e. The two variables are output per worker in the Canadian economy and Canada's rate of economic growth. Output per worker in the Canadian economy is the independent variable, since it is the cause, and Canada's rate of economic growth is the dependen t variab le, since it is the effect. 4 a. The relationship is inverse because the changes in the two variables are in the opposite direction. b. The relationship is direct because the changes in the two variables are in the same direction. c. The relationship is direct because the changes in the two variables are in the same direction. d. The relationship is direct because the changes in the two variables are in the same direction. e. The relationship is inverse because the changes in the two variables are in the opposite direction. 5. a. The statement deals with a topic in microeconomics because it focuses on a particular market - in this case the one associated with collectibles. b. The statement deals with a topic in microeconomics because it focuses on a particular market - i n this case the one associated with high fashion clothing. c. The statement deals with a topic in macroeconomics because it focuses on an entire economic sec tor and the economy as a whole. d. The statement deals with a topic in microeconomics because it focuses on a particular market - in this case the o ne associated with painkillers. e. The statement deals with a topic in macroeconomics because it focuses on an entire economic sector and the economy as a whole. 6. a. The statement is normative, since it is a statement of how the world ought to be. b. The statement is positive, since it is a description of reality that does not depend on value judgments. c. The statement is positive, since it is a description of reality that does not depend on value judgments. d. The statement is normative, since it is a statement of how the world ought to be. 7. a. The consumer will choose the video game console because its utility is higher than the utility asso ciated with the flat screen TV. b. Yes, utility does relate to the concept of opportunity cost. The opportu nity cost of either item is the utility sacrificed by not consuming the other item. Because the utility derived by this consumer from the flat - screen TV is lower than for the video game console, the opportunity cost of the console is less than for the TV. 8. a. In moving from points B to C, the output of bicycles increases by 1 (= 2 - 1) while skateboard production decreases by 6 (= 32 - 38). Therefore, a new bicycle has an opportunity cost of 6 skateboards. In moving from points C to D, bicycle production continues to rise by 1 (= 3 - 2) while skateboard output declines by 12 (= 20 - 32). Therefore, a new bicycle now has an oppo rtunity cost of 12 skateboards. These answers illustrate the law of increasing opportunity costs, because as more bicycles are produced there is a rise in the op portunity cost of this product. b. An output of 38 skateboards and 2 bicycles cannot be produced, since it lies beyond the production possibilities curve. c. An output of 32 skateboards and 1 bicycle is within the production possibilities curve. It represents a situation where re sources are not being used effectively, either because they are unemployed or used at less than their full capacity. 1 - 5 d. The technological improvement in the assembly of bicycles would cause the production possibilities curve to rotate rightwa rd, with the horizontal intercept shifting outward but the vertical intercept staying constant. This shows that the economy ' s potential output of bicycles has increased while the potential output of s kateboards has stayed the same. e. An increase in the economy ' s supply of labour would cause the production possibilities curve to shift to the right, with both the vertical and horizontal intercepts increasing. This shows that the economy ' s potential output of both bicycles and skateboards has increased. 9. a. The most stable culture is likely to be found in the country with the largest traditional sector (Country B), since a trad itional sec tor tends to promote stability. The most equal distribution of income is likely to be found in the country with the largest public sector (Country C), since one of the main functions of govern ment is to redistribute income. The greatest economic freedom is likely to be found in the country with the largest private sector (Country A), since private markets provide individ uals with the liberty to p ursue their own self - interest. b . With a larger private sector, Country B will move up and to the left as it becomes more like a pure market economy. With a larger public sector, Country C will move up and to the right as it becomes more like a pure command economy. 10. a. In moving from points a to b , the output of industrial robots increases by 2 (= 2 - 0) while ice - cream soda production decreases by 5,000 (= 45,000 - 50,000). Therefore, the two new industrial robots each have an opportunity cost of 2,500 (= 5,000 / 2) ice - cream sodas. In moving from points b to c , the production of industrial robots continues to rise by 2 (= 4 - 2) while ice - cream soda output declines by 10,000 (= 35,000 - 45,000) sodas. Therefore, the two new industrial robots each have an opportunity cost of 5,000 (= 10,000 / 2) so das . In moving from points e to d , the output of ice - cream sodas increases by 20,000 (= 20,000 - 0) while industrial robot production decreases by 2 (= 6 - 8). Therefore, the 20,000 new sodas each have an opportunity cost of 0.0001 = 2 / 20,000 industrial robots. In moving from points d to c , the output of ice - cream sodas increases by 15,000 (= 35,000 - 20,000) while industrial robot production decreases by 2 (= 4 - 6). Therefore, the 15,000 new sodas each have an opportunity cost of 0.00013 = 2 / 15,000 in dustrial robots. Yes, these answers illustrate the law of increasing opportunity costs. As the production of industrial robots increases (from a to b and from b to c ) so does the opportunity cost of the new robots produced, and when the production of ice - cream sodas increases (from e to d and from d to c ) so does the opportunity cost of the new sodas produced. b. The technological improvement in the assembly of industrial robots would cause the production possibilities curve to rotat e rightward, with the ho rizontal intercept shifting outward but the vertical intercept staying constant. This shows that the economy ' s potential output of robots has increased while the potential output of sodas has stayed the same. c. If this economy produces more industrial robots, which are capital goods, then the economy will increase its amount of available resources and therefore shift out its future production possibilities curve, with both the vertical and horizontal intercepts increasing. This shows that the economy ' s fut ure potential output of both sodas and industrial robots will increase. 11. Because households cannot keep any income above $60,000, those that could earn more by supplying their resources are unlikely to do so, reducing the overall amount of resources available to the economy. 12. . a. Year Inflation (%) Unemployment (%) Misery Index Above, below, or at the average? Year Inflation(%) Unemployment (%) Misery Index Above, below or at the average? 1990 4.8 8.1 [ 12.9 ] [ above ] 2000 2.7 6.8 [ 9.5 ] [ below ] 1991 5.6 10.3 [ 15.9 ] [ above ] 2001 2.5 7.2 [ 9.7 ] [ below ] 1992 1.4 11.2 [ 12.6 ] [ above ] 2002 2.2 7.7 [ 9.9 ] [ below ] 1993 1.9 11.4 [ 13.3 ] [ above ] 2003 2.8 7.6 [ 10.4 ] [ average ] 1994 0.1 10.4 [ 10.5 ] [ above ] 2004 1.8 7.2 [ 9.0 ] [ below ] 1995 2.2 9.5 [ 11.7 ] [ above ] 2005 2.2 6.8 [ 9.0 ] [ below ] 1996 1.5 9.6 [ 11.1 ] [ above ] 2006 2.0 6.3 [ 8.3 ] [ below ] 1997 1.7 9.1 [ 11 .8 ] [ above ] 2007 2.2 6.0 [ 8.2 ] [ below ] 1998 1.0 8.3 [ 9.3 ] [ below ] 2008 2.3 6.1 [ 8.4 ] [ below ] 1999 1.8 7.6 [ 9.4 ] [ below ] 2009 0.3 8.3 [ 8.6 ] [ below ] 2010 1.8 8.0 [ 9.8 ] [ below ] b. The average value during the years 1990 - 2010 was 10.4%. The misery index was above the average in 1990 to 1997. It was below the average in 1998 to 2002 and between 2005 and 2010. c. The misery index is an indicator of the distress to Canadians caused by both inflation and unemployment. In this index, th e inflation rate and the unemployment rate are each given the same weighting. Not everyone would agree with this weighting. For 1 - 6 example, it could be argued that a percentage point of unemployment causes more hardship and distress that a percentage point of inflation. 1 3 . (Essay) a. The provision of health care through the public sector makes it easier to ensure that all Canadians have equal access to services, thereby meeting an important goal relating to income equity. However, it is argued by many commentators that more private sector involvement in the provision of healthcare will help promote efficiency as well as hel p save costs, since at present prices are not allowed to work as a rationing mechanism in the Canadian health care system. This is because the most services in the current system are free. Therefore, some services may be overused, given that consumers face an effective zero price for these products. b. Answers may make a logical case for either stand using the arguments outlined in part a, depending on whether the goals of equity or efficiency are stressed. Internet Application Problem 1. Access the Penn World Tables (at http://dc2.chass.utoronto.ca/pwt ). Using statistics for 2007, rank the following economies - Canada, Finland, Hong Kong, and the United Kingdom - by the size of government in each economy. Enter your responses below rounded to 1 decimal place. The government share of real gross domestic product per capita was [ 11.6 ]% in Canada, [ 14.0 ]% in Finland, [ 3.2 ]% in Hong Kong, and [ 14.1 ]% in the UK. The government's share was highest in [ Canada; Finland; Hong Kong, the United Kingdom *], followed by [ Canada; Finland * ; Hong Kong, the United Kingdom ] then [ Canada * ; Finland; Hong Kong, the United Kingdom ] and lowest in [ Canada; Finland; Hong Kong * , the United Kingdom ]. What does your ranking suggest about the syste ms chosen by each economy? The ranking suggests that [ Canada and Finland; Finland and the United Kingdom; Hong Kong and Canada; all four countries * ] ha ve modern mixed economies. O f these countries [ Canada; Finland; Hong Kong, the United Kingdom *] chooses to lay the greatest stress on the public sector and [ Canada; Finland; Hong Kong * , the United Kingdom ] chooses to lay the greatest s tress on the private sector. Explanation: Accessing the site, select each of the countries (select all 4 countries at the same time by holding the 'Ctrl' key when making the selections), the statistic “Government Share of Real Gross Domestic Product per Capita” and the year 2007. In this year the share of government spending of overall GDP per capita was 11.6% in Canada, 14. 0% in Finland, 3.2% in Hong Kong and 14.1% in the United Kingdom. The government ' s share was highest in United Kingdom, followed by Finland, Canada, and Hong Kong. All four countries have modern mixed economies, with United Kingdom choosing to lay the gre atest stress on the public sector and Hong Kong choosing the lay the greatest stress on the private sector. Advancing Economic Thought Problems 1. As workers become more specialized, repetition helps them perform tasks more efficiently and without a break from one task to another. Hence the same number of workers in a pin - making factory will be able to produce a greater output if they perform separate rather than similar tasks. 2. (E ssay) a . T he exorbitant profits made in the production of Good W cause the invisible hand of competition to operate by enticing new entrepreneurs to enter the market. As they do, they push up the amount of Good W offered to consumers and push down the price. Price keeps falling until all suppliers i n the market make only a moderate profit. In this case, the selfish actions of entrepreneurs hoping to make excess profits ensures that, over time, excess profits are eradicated. b. By taking advantage of the cost - savings associated with the new innovation, businesses that produce Good X now make higher - than - normal profits. This causes the invisible hand of competition to operate, through the appearance of new entrepreneurs in the mar ket for Good X. The result is a rise in the amount supplied for this good, pushing down its price until all businesses producing this good are earning moderate profits. The selfishness of entrepreneurs seeking out excess profits causes price to fall to match the reduction in business costs. 1 - 7 c. With the free flow of goods between countries A and B, some businesses in each country now find they can underprice competitors in the other country's market. As trade occurs between the two countries, prices of affected goods fall. Due to t he self - interes ted behaviour of profit - seeking business - owners, consumers in both countries can buy certain goods more cheaply than they could before. 3. (E ssay) a. It is because hungry stadium - goers have no choice but to purchase food from the ca tering company that the company can charge prices greater than those charged on comparable food outside the stadium. b . The corporations may try to cooperate with one another to set Good Y's price above what it would be in a fully competitive market. The absence of full competition in this market could therefore lead to the self - interested actions of the corporations' manag ers harming the interests of the consumer. c . I t is impossible for Good Z to be made by workers who are not members of the union. As a result of the new union contract, wage costs for all firms producing the good rise, which pushes up Good Z's price. The lack of competition between unionized a nd nonuni onized workers in this labour market means that the self - interested actions of union members harm the interests of the consumer. Classroom Simulation 1. Introductory Information Time: a minimum of 30 minutes to complete all the parts of the simulation. Parts A, B, and C ea ch have a 3 minute time limit. Materials: tooth picks, several packages of small marshmallows, several packages of large marshmallows. Division of Students: Divide the class evenly into three teams (A, B, C). Push the desks together creating three long tables. Have each team sit at their respective table. You can have as many st udents participate as you like. Key Concepts Covered: circular flow diagram division of labour economic efficiency economic problem economics law of increasing opportunity costs opportunity cost product markets production possibilities curve resource markets Learning Objectives: Part A: - Analyze and apply the concepts of economic efficiency and the division of labour. - Participate in and examine a simulated mini - economy, while gaining insights into how this economy can incorporate product markets, resource markets and the circular flow diagram. Part B: - Identify and evaluate specific examples of opportunity cost. - Understand and apply the economic problem and the definition of economics to concrete examples. Part C: - Explain and evaluate the effect s of technology on the production possibilities curve as depicted by an outward shift in the curve. - Create and evaluate a production possibilities curve based on hands - on experience. - Apply the law of increasin g opportunity costs. 1 - 8 2. Part A Exercise Recall that the class has been divided evenly into three teams (A, B, and C), and that each team is sitting at their respecti ve tables. Team A: makes only houses out of tooth picks and small marshmallows using the pattern shown below. Team B: makes only cars out of tooth picks, small marshmallows, and large marshmallows using the pattern shown below. Team C: observes the other two teams to count, and keep track of, the number of each product that is made by each team. Timekeeper: the students will b e given three minutes to make as many units of their product as they can. Were more houses or cars produced? The number of houses made by team A was [ fill in appropriate value ], and the number of cars made by team B was [ fill in appropriate value ]. Were some students faster than the other students at putting the models together? How could produ ction have been more efficient? Explanation: Count the number of units of each product that were made during the allotted time. More houses than cars should have been produced because houses are easier to build, using the given patterns. Some students will have been faster at putting the models together than others. Because not al l people are created equal some will be more efficient at this task than others. Some ways the teams could have been more efficient is by having the fastest students assigned to build models, or by breaking the model building process down into smaller tas ks like a production line. Follow - up areas of learning: - Discuss the division of labour and its role in production. - Introduce product markets and resource markets. - Refer to the circular flow diagram by looking at what would be needed to make this a complete mini - economy including both households and bus inesses. 3. Part B Exercise Teams A and B merge as one company, called AB, that serves a town. Th is town has 50% more families than there are students in the room. Each family must have at least one house and one car produced by the company AB. Coincidentally the total number 1 - 9 of cars and houses demanded by this town is approximately double the number produced in Part A. Team A and Team B, now company AB: All members of AB will make houses or cars out of toothpicks and marshmallows using the patterns below (same patterns as in Part A). Teams A and B will decide together which of their members will make cars, houses, or some of both products. The goal is t o make approximately double the number of houses and cars that were produced in Part A. Company AB must find the best way to reach that goal. Team C: observes the other two teams to count, and keep track of, the number of each product that is made. Timekeeper: the students will be given three minutes to make as many units of their product as they can. Were more houses or cars produced than in Part A? The number of houses made by team A was [ fill in appropriate value ], and the number of cars made by team B was [ fill in appropriate value ]. Were more students producing houses or cars? More students were producing [ cars*; houses ] because cars take longer to make than houses .* houses take longer to make than cars . more families want a car. more families want a house . Explanation: It should have already been discovered from Part A that it takes longer to make cars than houses. Teams A and B, or company AB, should assign their fastest workers to produce cars. They should also assign more workers to produce cars than houses, or eventually some students will have to switch to making cars in order to obtain an identical number of units of both products. Follow - up areas of learning: - Reiterate the concepts of division of labour and economic efficiency. - Discuss the scarcity of economic resources, the unlimited nature of wants and needs, and the way these two concepts merge to create the economic problem. 4. Part C Exercise Teams A and B continue as one company, called AB, that serves a town with 50% more families as there are students in the room. And, as in Part B, the total number of cars and houses demanded by this town is approximately double the number produced in Part A. Team A and Team B, now company AB: Like in Part B, all members of AB will make houses or cars out of toothpicks and marshmallows using the patterns below (same patterns as in Part A). The goal is to make approximately double the number of houses and cars that were produced in Par t A.