Chapter 1 An Introduction to Microeconomics
Solutions
1.1 The first two steps would be taken in the realm of positive analysis:
determining the qualitative and quantitative effects of the proposed policy. The
third step would involve normative analysis: making a value judgment as to
whether or not the policy was desirable.
1.2 Answers can vary, especially this early in the course. Greater competition
between suppliers in the wake of deregulation likely explains the decline in the
relative price of interstate telephone calls. For medical care, students may suggest
things like the population is getting older, so there is more use of hospitals, or
increased government spending on health care programs such as Medicaid and
Medicare.
1.3 The nominal price of a good, by itself, doesn’t tell us very much. The value of a
dollar changes so prices measured in dollars change too. The real price measures
the price of a good in terms of what must be given up to get it. Real prices offer a
more stable standard.
1.4 Answer in text.
1.5 The opportunity cost of land is great in every major city, but probably much
higher in Tokyo than New York because of the relative greater scarcity of land in
Japan. Vending machines take up less space than newsstands, groceries, or liquor
stores, and economize on the scarce land.
1.6 Answer in text.
1.7 A draft would lower the accounting cost of maintaining an army but would not
,lower and probably increase economic cost. The economic cost of the draft is the
reduced output elsewhere in the economy when people serve in the army instead of
doing other jobs. With a volunteer army, the wages paid to the soldiers equals the
opportunity cost since the soldiers would not join unless their opportunity costs
were covered. (This analysis could be complicated further by considering training
benefits in the service as well). With a draft, the lower wages would often be less
than the opportunity cost of the soldiers so the accounting costs would not reflect
the economic costs. Further, some people would be drafted who would not have
served under a volunteer army because their opportunities outside the military
were better than the wage the army paid. Hence, the economic costs would be
greater under a draft than a volunteer army. (Note that the accounting costs could
also be higher if the costs of administering the draft were substantial.)
,1.8 a. Research production exhibits decreasing opportunity costs.
b. See the figure below. Infeasible production points lie above the PPF. Points
on the PPF make the most effective use of the university’s resources. Points
below the PPF indicate points where there are unemployed resources.
c. The opportunity cost of going from B to C is 6 units of research per unit of
, teaching.
d. The opportunity cost of going from C to B is 1/6 unit of teaching per unit of
research.
e. In the figure below, the new PPF is A'G.
f. The new PPF is HI in the figure below. (Assuming AG is the original PPF).
g. No, the president is wrong. Every point on the PPF is efficient.
1.9 False. The $5 billion sunk by Motorola into Iridium is a sunk cost and should not
be taken into account when making the decision of what should be done with the
venture from here on in.
1.10 The more productive a populace, the higher is the opportunity cost associated
with government-sponsored killing of that populace and thus the less we should
observe such killing.
1.11 Downward...given that some net economic benefits presumably can be
generated by cellular phone callers while stuck in traffic.
1.12 The opportunity cost of traditional shopping has increased as the growth of
two-wage-earner families has increased. Online shopping has a lower opportunity
cost relative to traditional shopping, all else equal, thus we would predict and
increase in the rate of substitution to the lower opportunity cost activity as two-
wage-earner families increases.
1.13 Yes, Tillman made a rational choice from an economics perspective. On account
Solutions
1.1 The first two steps would be taken in the realm of positive analysis:
determining the qualitative and quantitative effects of the proposed policy. The
third step would involve normative analysis: making a value judgment as to
whether or not the policy was desirable.
1.2 Answers can vary, especially this early in the course. Greater competition
between suppliers in the wake of deregulation likely explains the decline in the
relative price of interstate telephone calls. For medical care, students may suggest
things like the population is getting older, so there is more use of hospitals, or
increased government spending on health care programs such as Medicaid and
Medicare.
1.3 The nominal price of a good, by itself, doesn’t tell us very much. The value of a
dollar changes so prices measured in dollars change too. The real price measures
the price of a good in terms of what must be given up to get it. Real prices offer a
more stable standard.
1.4 Answer in text.
1.5 The opportunity cost of land is great in every major city, but probably much
higher in Tokyo than New York because of the relative greater scarcity of land in
Japan. Vending machines take up less space than newsstands, groceries, or liquor
stores, and economize on the scarce land.
1.6 Answer in text.
1.7 A draft would lower the accounting cost of maintaining an army but would not
,lower and probably increase economic cost. The economic cost of the draft is the
reduced output elsewhere in the economy when people serve in the army instead of
doing other jobs. With a volunteer army, the wages paid to the soldiers equals the
opportunity cost since the soldiers would not join unless their opportunity costs
were covered. (This analysis could be complicated further by considering training
benefits in the service as well). With a draft, the lower wages would often be less
than the opportunity cost of the soldiers so the accounting costs would not reflect
the economic costs. Further, some people would be drafted who would not have
served under a volunteer army because their opportunities outside the military
were better than the wage the army paid. Hence, the economic costs would be
greater under a draft than a volunteer army. (Note that the accounting costs could
also be higher if the costs of administering the draft were substantial.)
,1.8 a. Research production exhibits decreasing opportunity costs.
b. See the figure below. Infeasible production points lie above the PPF. Points
on the PPF make the most effective use of the university’s resources. Points
below the PPF indicate points where there are unemployed resources.
c. The opportunity cost of going from B to C is 6 units of research per unit of
, teaching.
d. The opportunity cost of going from C to B is 1/6 unit of teaching per unit of
research.
e. In the figure below, the new PPF is A'G.
f. The new PPF is HI in the figure below. (Assuming AG is the original PPF).
g. No, the president is wrong. Every point on the PPF is efficient.
1.9 False. The $5 billion sunk by Motorola into Iridium is a sunk cost and should not
be taken into account when making the decision of what should be done with the
venture from here on in.
1.10 The more productive a populace, the higher is the opportunity cost associated
with government-sponsored killing of that populace and thus the less we should
observe such killing.
1.11 Downward...given that some net economic benefits presumably can be
generated by cellular phone callers while stuck in traffic.
1.12 The opportunity cost of traditional shopping has increased as the growth of
two-wage-earner families has increased. Online shopping has a lower opportunity
cost relative to traditional shopping, all else equal, thus we would predict and
increase in the rate of substitution to the lower opportunity cost activity as two-
wage-earner families increases.
1.13 Yes, Tillman made a rational choice from an economics perspective. On account
