Microeconomics
12th Edition
by David C. Colander
Complete Chapter Solutions Manual
are included (Ch 1 to 23)
** Immediate Download
** Swift Response
** All Chapters included
** ABA Teaching Notes
** Web Notes
** Answers to Problems Set
,CHAPTER 1: ECONOMICS AND ECONOMIC
REASONING
Questions and Exercises
1. Coordination refers to how the three central problems facing any economy are
solved. Those three problems are what and how much to produce, how to
produce, and for whom to produce. Inevitably, individuals desire more than is
available regardless of how much they’re willing to work for what they desire,
causing a problem of scarcity.
The concept of scarcity has two elements: our wants and our means of fulfilling
those wants. These two elements are interrelated since wants are changeable and
are partially determined by society. In addition, the degree of scarcity is
constantly changing, depending upon the available means of production and the
development of new wants.
Therefore, the author focused on coordination rather than on scarcity to
emphasize the subsidiary nature of scarcity to the overall concept of coordination.
Economics is not merely about our wants or the means of fulfilling those wants; it
is also about reconciling our wants with reality, where reality consists of decision-
making mechanisms, social customs, and political realities.
2. a. Macroeconomic
b. Microeconomic
c. Macroeconomic
d. Microeconomic
e. Microeconomic
f. Microeconomic
Microeconomics studies how economic forces influence individual choices such
as the pricing policies of firms, households’ decisions on what to buy, and how
markets allocate resources among alternative ends. Macroeconomics studies
aggregate relationships such as how household consumption is related to income
and how government policies can affect growth.
3. Answers will differ. Two microeconomic problems are the pricing policies of
firms (price-fixing in particular) and the way wages are determined in labor
markets. (Why do athletes and celebrities make so much money, anyway?) Two
macroeconomic problems are unemployment and inflation (business cycles and
growth are also macroeconomic problems).
1
.
,4. a. The opportunity cost of attending college is the sacrifice one must make
by attending college. It can be estimated by figuring out the benefit of the next-
best alternative. If that alternative is working, one would guess the likely wage
that could be earned at a job that does not require a college degree and then
multiply by 40 hours for each week in college. The opportunity cost is also what
could be done with the money used for tuition and other costs related to attending
college.
b. The opportunity cost of taking a course could also be estimated using the same
technique as in part a if you otherwise would be working during these hours. If
you had taken another course instead, the opportunity cost would be the benefit
you would have received from taking that other course.
c. The opportunity cost of attending yesterday’s lecture would depend on what you
otherwise could have done with that time (sleep, eat lunch with an interesting
person, etc.). Although this is no longer a choice to you, past activities do have
opportunity costs.
5. Answers will vary. A correct answer will indicate that the student compared the
marginal costs and benefits and chose the activity because the marginal benefit
exceeded the marginal cost.
6. The marginal costs are the additional costs of the additional activity. In this case,
the additional activity is driving (200 − 100) miles. The marginal cost is the 10
cents per mile for all miles over 100 plus the additional cost of gas. Therefore, the
marginal cost is $10.00 = [0.10 ´ (200 - 100)] plus the cost of gas. The initial
payment can be forgotten because it is a sunk cost; it is not part of the marginal
costs.
7. No, since the marginal cost of drug control exceeds the marginal benefit; the
government should not spend $4,170 to deter one person from using drugs.
8. The opportunity cost of buying a $20,000 car is the benefit you would have
gained by using that $20,000 for the next-best alternative, which could be
spending it on other goods and services or saving it.
9. Only the marginal costs and benefits of taking the job are relevant. That means
that the sunk cost of the bachelor’s degree is irrelevant. Therefore, the relevant
costs are the opportunity cost of taking the job (forgone earnings from your
current job) and other things you could have done with the money you need to
2
.
, pay for business school. The relevant benefit is the increased lifetime earnings of
$600,000.
10. You should spend the $5 million on projects that provide the highest marginal
benefit per dollar spent. The opportunity cost of spending the money on one
project is the lost benefit that the college would have received by spending it on a
different project. Thus, another way to restate the decision rule is to spend the
money on the project that minimizes opportunity cost per dollar.
11. Answers will differ. Two examples of social forces are our unwillingness to
charge friends interest and our unwillingness to “buy” friends. These issues are
still subject to economic forces; however, there is no market in “friends” or in
loans to friends, and so the economic force does not become a market force.
12. Answers will differ. Two examples of political or legal forces are rent control
laws and restrictions on immigration. Both prevent the invisible hand from
working. Rent control laws place a price ceiling on rent, causing shortages of
apartments, and immigration restrictions cause the number of immigrants seeking
entry to exceed the number allowed to enter, which tends to cause wage rates to
differ among countries.
13. a. Both parties benefit. The person who gains the kidney benefits if it works when
transplanted into his or her body as he or she will no longer have the emotional
and financial burden of dialysis. The person selling the kidney gains the $30,000.
Their gains will also have impacts on others (their family, for example).
b. Both parties must undergo surgery and face all the attendant risks and costs. The
seller faces the potential cost of a future illness or injury harming his or her only
remaining kidney, causing the seller to need dialysis. It raises moral issues that
could be seen as hurting society because organs change from being inalienable to
being a commodity and, hence, is another element that negatively affects the
individuals.
c. Whether a society should allow this transaction is a question of value judgments
and cultural norms. Our society has chosen not to allow such transactions because
(among other reasons) those with more money would have increased access to
organs and therefore would have advantages over those of limited means. Thus,
the poor could be exploited in such transactions.
14. An economic model is a framework that places the generalized insights of a
theory in a more specific contextual setting. Policymakers need to understand the
3
.
12th Edition
by David C. Colander
Complete Chapter Solutions Manual
are included (Ch 1 to 23)
** Immediate Download
** Swift Response
** All Chapters included
** ABA Teaching Notes
** Web Notes
** Answers to Problems Set
,CHAPTER 1: ECONOMICS AND ECONOMIC
REASONING
Questions and Exercises
1. Coordination refers to how the three central problems facing any economy are
solved. Those three problems are what and how much to produce, how to
produce, and for whom to produce. Inevitably, individuals desire more than is
available regardless of how much they’re willing to work for what they desire,
causing a problem of scarcity.
The concept of scarcity has two elements: our wants and our means of fulfilling
those wants. These two elements are interrelated since wants are changeable and
are partially determined by society. In addition, the degree of scarcity is
constantly changing, depending upon the available means of production and the
development of new wants.
Therefore, the author focused on coordination rather than on scarcity to
emphasize the subsidiary nature of scarcity to the overall concept of coordination.
Economics is not merely about our wants or the means of fulfilling those wants; it
is also about reconciling our wants with reality, where reality consists of decision-
making mechanisms, social customs, and political realities.
2. a. Macroeconomic
b. Microeconomic
c. Macroeconomic
d. Microeconomic
e. Microeconomic
f. Microeconomic
Microeconomics studies how economic forces influence individual choices such
as the pricing policies of firms, households’ decisions on what to buy, and how
markets allocate resources among alternative ends. Macroeconomics studies
aggregate relationships such as how household consumption is related to income
and how government policies can affect growth.
3. Answers will differ. Two microeconomic problems are the pricing policies of
firms (price-fixing in particular) and the way wages are determined in labor
markets. (Why do athletes and celebrities make so much money, anyway?) Two
macroeconomic problems are unemployment and inflation (business cycles and
growth are also macroeconomic problems).
1
.
,4. a. The opportunity cost of attending college is the sacrifice one must make
by attending college. It can be estimated by figuring out the benefit of the next-
best alternative. If that alternative is working, one would guess the likely wage
that could be earned at a job that does not require a college degree and then
multiply by 40 hours for each week in college. The opportunity cost is also what
could be done with the money used for tuition and other costs related to attending
college.
b. The opportunity cost of taking a course could also be estimated using the same
technique as in part a if you otherwise would be working during these hours. If
you had taken another course instead, the opportunity cost would be the benefit
you would have received from taking that other course.
c. The opportunity cost of attending yesterday’s lecture would depend on what you
otherwise could have done with that time (sleep, eat lunch with an interesting
person, etc.). Although this is no longer a choice to you, past activities do have
opportunity costs.
5. Answers will vary. A correct answer will indicate that the student compared the
marginal costs and benefits and chose the activity because the marginal benefit
exceeded the marginal cost.
6. The marginal costs are the additional costs of the additional activity. In this case,
the additional activity is driving (200 − 100) miles. The marginal cost is the 10
cents per mile for all miles over 100 plus the additional cost of gas. Therefore, the
marginal cost is $10.00 = [0.10 ´ (200 - 100)] plus the cost of gas. The initial
payment can be forgotten because it is a sunk cost; it is not part of the marginal
costs.
7. No, since the marginal cost of drug control exceeds the marginal benefit; the
government should not spend $4,170 to deter one person from using drugs.
8. The opportunity cost of buying a $20,000 car is the benefit you would have
gained by using that $20,000 for the next-best alternative, which could be
spending it on other goods and services or saving it.
9. Only the marginal costs and benefits of taking the job are relevant. That means
that the sunk cost of the bachelor’s degree is irrelevant. Therefore, the relevant
costs are the opportunity cost of taking the job (forgone earnings from your
current job) and other things you could have done with the money you need to
2
.
, pay for business school. The relevant benefit is the increased lifetime earnings of
$600,000.
10. You should spend the $5 million on projects that provide the highest marginal
benefit per dollar spent. The opportunity cost of spending the money on one
project is the lost benefit that the college would have received by spending it on a
different project. Thus, another way to restate the decision rule is to spend the
money on the project that minimizes opportunity cost per dollar.
11. Answers will differ. Two examples of social forces are our unwillingness to
charge friends interest and our unwillingness to “buy” friends. These issues are
still subject to economic forces; however, there is no market in “friends” or in
loans to friends, and so the economic force does not become a market force.
12. Answers will differ. Two examples of political or legal forces are rent control
laws and restrictions on immigration. Both prevent the invisible hand from
working. Rent control laws place a price ceiling on rent, causing shortages of
apartments, and immigration restrictions cause the number of immigrants seeking
entry to exceed the number allowed to enter, which tends to cause wage rates to
differ among countries.
13. a. Both parties benefit. The person who gains the kidney benefits if it works when
transplanted into his or her body as he or she will no longer have the emotional
and financial burden of dialysis. The person selling the kidney gains the $30,000.
Their gains will also have impacts on others (their family, for example).
b. Both parties must undergo surgery and face all the attendant risks and costs. The
seller faces the potential cost of a future illness or injury harming his or her only
remaining kidney, causing the seller to need dialysis. It raises moral issues that
could be seen as hurting society because organs change from being inalienable to
being a commodity and, hence, is another element that negatively affects the
individuals.
c. Whether a society should allow this transaction is a question of value judgments
and cultural norms. Our society has chosen not to allow such transactions because
(among other reasons) those with more money would have increased access to
organs and therefore would have advantages over those of limited means. Thus,
the poor could be exploited in such transactions.
14. An economic model is a framework that places the generalized insights of a
theory in a more specific contextual setting. Policymakers need to understand the
3
.
