SOLUTIONS MANUAL Principles of Macroeconomics 10th Canadian
Edition by John Sayre
CHAPTER ONE
The Economic Problem
Overview Comments
In Chapter One, we decided to begin by giving students an idea of how diverse and how
engaged our discipline is by looking at a number of current controversies. This, we hope
helps to correct the perception that many students have of economics as being a dry and
theoretical subject with little relevance to the real world. We then focus on what is,
arguably, the most important idea in economics: that scarcity forces choice and choice
involves the concept of opportunity cost. We look at the three fundamental questions in
economics and four methods of co-ordinating an economy and we have found that
students react well to a discussion of both of these topics. Perhaps we should remind
ourselves that introductory chapters are probably the only opportunity for us to encourage
students to look beyond the market structure and realize that it is only one of various
possible ways for society to organize its economic affairs.
We discuss the fact that the discipline’s methodology is, by necessity, abstract, since this
is the only way one can deal with such a broad range of topics. The discussion of the use
of abstract methodology leads naturally into a discussion of the role of models in
economics.
We then look at our first model in economics, production possibilities, and show how
illuminating this idea can be since it allows us to illustrate some of the basic, but vital
topics in economics: choice, cost, economic growth, technological improvement and the
immense importance of investment.
Suggested Approaches and Helpful Hints
As a starting point in a new course, it may be useful for you to walk students through the
Study Guide (as well as the Test your Understanding questions in the body of each
chapter) and explain that answers can be found in the Connect Answer Key. Answers to
the Problems for Further Study are found below.
Many years of teaching the Principles has convinced both of your authors than the vast
majority of students can get a good grade in this supposedly tough course if they do all of
the questions in the Study Guide. For some, this will, at first, take a lot of time but
inevitably they will get faster and faster at answering questions as the term progresses
and this will do wonders for their self-confidence.
It is our experience that if we spend enough time on production possibilities, we can
illustrate six distinct aspects of economics: the necessity of choice, economic growth,
,unemployment, efficiency, technological change and opportunity cost. This makes
production possibilities a powerful model and, more importantly, demonstrates what we
mean by the word model. Given the huge role that models play in economic theory,
understanding exactly what a model is can be an important step for any student.
Answers to Problems for Further Study
1. 1. d 2. c 3. b 4. a
2. a) normative; b) positive; c) positive; d) normative.
3. a) K b) L c) N d) N e) E
4. a) C b) K c) C d) B
5. Economics is interested in how society makes choices about the production and
allocation of resources and products. All societies must make choices since they will
never be able to produce everything that people want. The reason for this is that
resources are scarce in relation to unlimited human wants.
6.
Factors of Production Factor explained Factor Payments
Labour human physical and mental effort wages
Capital human made resources interest
Land natural resources rent
Enterprise the innovator and risk-taker profit
7. Normative statement: There are too many poor people in Canada.
Positive statement: In 2016, there were more than 2.5 million Canadians
earning less than $15 000.
,8.
Capital
goods
PP1 PP2
Consumer goods
There are two major causes of economic growth:
• an increase in the quantity or quality of productive resources
• an improvement in technology
9. The production possibility curve would look as follows:
, The production possibilities curve would plot as a straight line because the per unit cost
of production would remain constant. In other words, it would always cost the same
number of moccasins to produce additional shirts, and vice versa.
10. Both a map and a theory abstract from reality and highlight only the most important
relationships.
11. Command comes in the form of parents insisting that children do certain things such as
cleaning their room. Most “big” decisions like where to take a holiday are often made
co-operatively. Custom comes in the form of parents using the same values to raise
their children as was used by their own parents. Competition might be used, for
example where siblings compete with each other to earn increments of allowance. The
second half of the question is asked only to stimulate thought on the effectiveness of
incentives (rewards) and dis-incentives (penalties) within the family structure.
12. Since Kant is a high school dropout with no work experience, we would have to
recognize that his next best alternative is probably a minimum wage job. (On the other
hand, if some employer considers Kant enough of celebrity to hire him for a public
image job, then Kant might do better.) Assuming a minimum wage job, his opportunity
cost of continuing to play hockey would the minimum wage rate (say $10 and hour)
times 40 (hours per week) times 52 (weeks per year) which equals $20.800 per year.
13. See the following figure:
14. It might be said that a high level of income is necessary for a higher standard of living
because a higher income usually implies more goods and services for people as well
as better health and education services. However, just because the average income of
Edition by John Sayre
CHAPTER ONE
The Economic Problem
Overview Comments
In Chapter One, we decided to begin by giving students an idea of how diverse and how
engaged our discipline is by looking at a number of current controversies. This, we hope
helps to correct the perception that many students have of economics as being a dry and
theoretical subject with little relevance to the real world. We then focus on what is,
arguably, the most important idea in economics: that scarcity forces choice and choice
involves the concept of opportunity cost. We look at the three fundamental questions in
economics and four methods of co-ordinating an economy and we have found that
students react well to a discussion of both of these topics. Perhaps we should remind
ourselves that introductory chapters are probably the only opportunity for us to encourage
students to look beyond the market structure and realize that it is only one of various
possible ways for society to organize its economic affairs.
We discuss the fact that the discipline’s methodology is, by necessity, abstract, since this
is the only way one can deal with such a broad range of topics. The discussion of the use
of abstract methodology leads naturally into a discussion of the role of models in
economics.
We then look at our first model in economics, production possibilities, and show how
illuminating this idea can be since it allows us to illustrate some of the basic, but vital
topics in economics: choice, cost, economic growth, technological improvement and the
immense importance of investment.
Suggested Approaches and Helpful Hints
As a starting point in a new course, it may be useful for you to walk students through the
Study Guide (as well as the Test your Understanding questions in the body of each
chapter) and explain that answers can be found in the Connect Answer Key. Answers to
the Problems for Further Study are found below.
Many years of teaching the Principles has convinced both of your authors than the vast
majority of students can get a good grade in this supposedly tough course if they do all of
the questions in the Study Guide. For some, this will, at first, take a lot of time but
inevitably they will get faster and faster at answering questions as the term progresses
and this will do wonders for their self-confidence.
It is our experience that if we spend enough time on production possibilities, we can
illustrate six distinct aspects of economics: the necessity of choice, economic growth,
,unemployment, efficiency, technological change and opportunity cost. This makes
production possibilities a powerful model and, more importantly, demonstrates what we
mean by the word model. Given the huge role that models play in economic theory,
understanding exactly what a model is can be an important step for any student.
Answers to Problems for Further Study
1. 1. d 2. c 3. b 4. a
2. a) normative; b) positive; c) positive; d) normative.
3. a) K b) L c) N d) N e) E
4. a) C b) K c) C d) B
5. Economics is interested in how society makes choices about the production and
allocation of resources and products. All societies must make choices since they will
never be able to produce everything that people want. The reason for this is that
resources are scarce in relation to unlimited human wants.
6.
Factors of Production Factor explained Factor Payments
Labour human physical and mental effort wages
Capital human made resources interest
Land natural resources rent
Enterprise the innovator and risk-taker profit
7. Normative statement: There are too many poor people in Canada.
Positive statement: In 2016, there were more than 2.5 million Canadians
earning less than $15 000.
,8.
Capital
goods
PP1 PP2
Consumer goods
There are two major causes of economic growth:
• an increase in the quantity or quality of productive resources
• an improvement in technology
9. The production possibility curve would look as follows:
, The production possibilities curve would plot as a straight line because the per unit cost
of production would remain constant. In other words, it would always cost the same
number of moccasins to produce additional shirts, and vice versa.
10. Both a map and a theory abstract from reality and highlight only the most important
relationships.
11. Command comes in the form of parents insisting that children do certain things such as
cleaning their room. Most “big” decisions like where to take a holiday are often made
co-operatively. Custom comes in the form of parents using the same values to raise
their children as was used by their own parents. Competition might be used, for
example where siblings compete with each other to earn increments of allowance. The
second half of the question is asked only to stimulate thought on the effectiveness of
incentives (rewards) and dis-incentives (penalties) within the family structure.
12. Since Kant is a high school dropout with no work experience, we would have to
recognize that his next best alternative is probably a minimum wage job. (On the other
hand, if some employer considers Kant enough of celebrity to hire him for a public
image job, then Kant might do better.) Assuming a minimum wage job, his opportunity
cost of continuing to play hockey would the minimum wage rate (say $10 and hour)
times 40 (hours per week) times 52 (weeks per year) which equals $20.800 per year.
13. See the following figure:
14. It might be said that a high level of income is necessary for a higher standard of living
because a higher income usually implies more goods and services for people as well
as better health and education services. However, just because the average income of
