Solutions - Principles of Macroeconomics, 3rd Edition by Betsey Stevenson; Wolfers
[Chapter 1 : End-of-Chapter Solutions]
Study Problems
Problem 1
1. Consider the following statement: “Economists always put things into monetary terms; as a
result economics can most appropriately be called the study of money.”
Is this true or false? Briefly explain your reasoning.
Solution 1
1. This is false. Economists use monetary values because they provide a common metric for
measurement that enables them to compare the costs and benefits of a variety of different
outcomes. Essentially, it allows economists to compare apples to oranges. Expressing benefits
and costs in monetary terms simplifies the process of analyzing the decisions that we make in our
everyday lives. Economics, therefore, is more accurately described as the study of the decisions
that are made by individuals, firms, and governments.
Problem 2
2. Use the cost-benefit principle to evaluate the following:
a. You are about to buy a calculator for $10, and the salesperson tells you that the model you
want to buy is on sale for $5 at the store’s other branch, which is a 20-minute drive away. Would
you make the trip?
b. You are about to buy a laptop for $1,000 and the salesperson tells you that the model you want
to buy is on sale for $995 at the store’s other branch, which is a 20-minute drive away. Would
you make the trip?
,c. Did you make the same choice in both cases? Should you have? Do you think this is how
people actually choose?
Solution 2
2. Student answers will vary. To apply the cost-benefit principle, analyze the full set of costs and
benefits (both monetary and non-monetary) of both alternatives. Only pursue the choice whose
benefits are at least as large as the costs to maximize your economic surplus. Convert costs and
benefits into dollars using your willingness to pay.
In parts a and b, your answer will depend on your willingness to pay. If you buy at the current
store, you will get the benefit of having the calculator and laptop now. If you buy at the other
branch, you save money off the purchase, but you forgo gas cost and travel time. How much
does the gas cost, and how much is your time worth to you?
For part c, note that in both cases, if you accept the offer, you are driving 20 minutes to save $5.
Your answer should be the same in both cases. However, many people may fall victim to the
framing effect, when a decision is affected by how a choice is presented. Saving $5 off the
calculator is 50% off the retail price. Saving $5 off the laptop is 0.5% off the retail price. In both
cases, the savings is $5. Although the framing effect is common, it is not rational. You should
make decisions based on the costs and benefits, not by how they are framed.
Problem 3
3. Ivan has inherited his mother’s 1963 Chevrolet Corvette, which he values at $45,000. He
decides that he might be willing to sell it so he posts it on Craigslist for $55,000. Samantha is
interested and willing to pay up to $72,000. Would Ivan and Samantha want to voluntarily
engage in trade? How much economic surplus is created for both of them as a result of this
exchange? What is the total economic surplus?
Solution 3
,3. Yes. In this case the benefit Ivan receives is the $55,000. The cost is that Ivan is no longer able
to receive benefits from owning the car, which he values at $45,000. Since the benefits exceed
the costs, Ivan would voluntarily engage in this exchange because doing so makes him better off.
In this case the benefit Samantha receives is the $72,000 she is willing to pay. The cost is the
price she ends up paying, which is $55,000. Since the benefits exceed the costs, Samantha would
voluntarily engage in this exchange because doing so makes her better off. Notice that both Ivan
and Samantha are benefiting from this voluntary exchange. Ivan values the car at $45,000 and
receives $55,000, so his economic surplus is $55,000 − $45,000 = $10,000. Samantha values the
car at $72,000 and it costs her $55,000, so her economic surplus is $72,000 − $55,000 = $17,000.
Total surplus is the combination of Ivan and Samantha’s surplus, $27,000.
Problem 4
4. You are considering whether you should go out to dinner at a restaurant with your friend. The
meal is expected to cost you $40, you typically leave a 20% tip, and an Uber will cost you $5 to
get there. You value the restaurant meal at $20. You enjoy your friend’s company and are willing
to pay $30 just to spend an evening with her. If you did not go out to the restaurant, you would
eat at home using groceries that cost you $8. How much are the benefits and costs associated
with going out to dinner with your friend? Should you go out to dinner with your friend?
Solution 4
4. The benefits are $58. You receive $20 worth of benefit from the restaurant meal itself. You
also receive $30 worth of benefit from having dinner with your friend. Additionally, by not
eating at home, you will save $8 on the groceries you would have purchased. The total benefit,
therefore, would be $58. The costs are $53. The price of the meal will be $40. You will also
leave a 20% tip, which adds another $8. Your car fare is $5. So, the total cost would be $53. The
total benefits are equal to $58 and the total costs are equal to $53. So, going to dinner with your
friend will yield $5 worth of economic surplus and you should go out to dinner with your friend.
, Problem 5
5. During the economic downturn of 2008–2009, the unemployment rate increased to nearly
10%. At the same time, the price of college tuition and the number of college enrollees
increased. Using the opportunity cost principle, explain why more people would enroll in college
during this time period even as the price of college increased.
Solution 5
5. One of the main costs associated with going to college is that individuals are giving up the
opportunity to work in the labor market instead. One of the key opportunity costs then is the
earnings that a student would have earned had they decided not to attend college. When the
economy is in a recession, there are fewer jobs available and wages tend to be lower than when
the economy is not in a recession. Therefore, the opportunity cost of going to college is also
reduced during a recession.
Problem 6
6. A friend once remarked that longer movies were a better deal than shorter movies because the
ticket price was the same in both cases. Therefore, the longer movie provided more benefit for
the same cost as a shorter movie. Using the opportunity cost principle, evaluate your friend’s
statement.
Solution 6
6. When making an economic decision, you need to incorporate all the costs and benefits
involved. The ticket price is only part of the opportunity cost of watching a movie. There are also
the time costs. With longer movies, the time costs are greater. This is one of the reasons why
movie studios often try to limit the length of films; they are concerned that longer films may turn
away customers due to the additional opportunity costs. However, it may also be the case that the
[Chapter 1 : End-of-Chapter Solutions]
Study Problems
Problem 1
1. Consider the following statement: “Economists always put things into monetary terms; as a
result economics can most appropriately be called the study of money.”
Is this true or false? Briefly explain your reasoning.
Solution 1
1. This is false. Economists use monetary values because they provide a common metric for
measurement that enables them to compare the costs and benefits of a variety of different
outcomes. Essentially, it allows economists to compare apples to oranges. Expressing benefits
and costs in monetary terms simplifies the process of analyzing the decisions that we make in our
everyday lives. Economics, therefore, is more accurately described as the study of the decisions
that are made by individuals, firms, and governments.
Problem 2
2. Use the cost-benefit principle to evaluate the following:
a. You are about to buy a calculator for $10, and the salesperson tells you that the model you
want to buy is on sale for $5 at the store’s other branch, which is a 20-minute drive away. Would
you make the trip?
b. You are about to buy a laptop for $1,000 and the salesperson tells you that the model you want
to buy is on sale for $995 at the store’s other branch, which is a 20-minute drive away. Would
you make the trip?
,c. Did you make the same choice in both cases? Should you have? Do you think this is how
people actually choose?
Solution 2
2. Student answers will vary. To apply the cost-benefit principle, analyze the full set of costs and
benefits (both monetary and non-monetary) of both alternatives. Only pursue the choice whose
benefits are at least as large as the costs to maximize your economic surplus. Convert costs and
benefits into dollars using your willingness to pay.
In parts a and b, your answer will depend on your willingness to pay. If you buy at the current
store, you will get the benefit of having the calculator and laptop now. If you buy at the other
branch, you save money off the purchase, but you forgo gas cost and travel time. How much
does the gas cost, and how much is your time worth to you?
For part c, note that in both cases, if you accept the offer, you are driving 20 minutes to save $5.
Your answer should be the same in both cases. However, many people may fall victim to the
framing effect, when a decision is affected by how a choice is presented. Saving $5 off the
calculator is 50% off the retail price. Saving $5 off the laptop is 0.5% off the retail price. In both
cases, the savings is $5. Although the framing effect is common, it is not rational. You should
make decisions based on the costs and benefits, not by how they are framed.
Problem 3
3. Ivan has inherited his mother’s 1963 Chevrolet Corvette, which he values at $45,000. He
decides that he might be willing to sell it so he posts it on Craigslist for $55,000. Samantha is
interested and willing to pay up to $72,000. Would Ivan and Samantha want to voluntarily
engage in trade? How much economic surplus is created for both of them as a result of this
exchange? What is the total economic surplus?
Solution 3
,3. Yes. In this case the benefit Ivan receives is the $55,000. The cost is that Ivan is no longer able
to receive benefits from owning the car, which he values at $45,000. Since the benefits exceed
the costs, Ivan would voluntarily engage in this exchange because doing so makes him better off.
In this case the benefit Samantha receives is the $72,000 she is willing to pay. The cost is the
price she ends up paying, which is $55,000. Since the benefits exceed the costs, Samantha would
voluntarily engage in this exchange because doing so makes her better off. Notice that both Ivan
and Samantha are benefiting from this voluntary exchange. Ivan values the car at $45,000 and
receives $55,000, so his economic surplus is $55,000 − $45,000 = $10,000. Samantha values the
car at $72,000 and it costs her $55,000, so her economic surplus is $72,000 − $55,000 = $17,000.
Total surplus is the combination of Ivan and Samantha’s surplus, $27,000.
Problem 4
4. You are considering whether you should go out to dinner at a restaurant with your friend. The
meal is expected to cost you $40, you typically leave a 20% tip, and an Uber will cost you $5 to
get there. You value the restaurant meal at $20. You enjoy your friend’s company and are willing
to pay $30 just to spend an evening with her. If you did not go out to the restaurant, you would
eat at home using groceries that cost you $8. How much are the benefits and costs associated
with going out to dinner with your friend? Should you go out to dinner with your friend?
Solution 4
4. The benefits are $58. You receive $20 worth of benefit from the restaurant meal itself. You
also receive $30 worth of benefit from having dinner with your friend. Additionally, by not
eating at home, you will save $8 on the groceries you would have purchased. The total benefit,
therefore, would be $58. The costs are $53. The price of the meal will be $40. You will also
leave a 20% tip, which adds another $8. Your car fare is $5. So, the total cost would be $53. The
total benefits are equal to $58 and the total costs are equal to $53. So, going to dinner with your
friend will yield $5 worth of economic surplus and you should go out to dinner with your friend.
, Problem 5
5. During the economic downturn of 2008–2009, the unemployment rate increased to nearly
10%. At the same time, the price of college tuition and the number of college enrollees
increased. Using the opportunity cost principle, explain why more people would enroll in college
during this time period even as the price of college increased.
Solution 5
5. One of the main costs associated with going to college is that individuals are giving up the
opportunity to work in the labor market instead. One of the key opportunity costs then is the
earnings that a student would have earned had they decided not to attend college. When the
economy is in a recession, there are fewer jobs available and wages tend to be lower than when
the economy is not in a recession. Therefore, the opportunity cost of going to college is also
reduced during a recession.
Problem 6
6. A friend once remarked that longer movies were a better deal than shorter movies because the
ticket price was the same in both cases. Therefore, the longer movie provided more benefit for
the same cost as a shorter movie. Using the opportunity cost principle, evaluate your friend’s
statement.
Solution 6
6. When making an economic decision, you need to incorporate all the costs and benefits
involved. The ticket price is only part of the opportunity cost of watching a movie. There are also
the time costs. With longer movies, the time costs are greater. This is one of the reasons why
movie studios often try to limit the length of films; they are concerned that longer films may turn
away customers due to the additional opportunity costs. However, it may also be the case that the
