Macroeconomics 3e By Karlan

Chapter 01 - Economics and Life 1-1 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CHAPTER 1 ECONOMICS AND LIFE Solutions to End-of-Chapter Questions and Problems Review Questions 1. Suppose you are shopping for new clothes to wear to job interviews, but you’re on a tight budget. In this situation, what are your wants and constraints? What does it mean to behave rationally in the face of scarcity? [LO 1.1] Answer: If you are deciding what to buy for a job interview, your want is to buy clothing that looks clean and professional, so you can present the best possible impression to potential employers. Your constraint is the amount of money you can spend on this clothing. A person behaving rationally would buy the nicest clothes they could afford. 2. You are a student with a demanding schedule of classes. You also work part time and your supervisor allows you to determine your schedule. In this situation, what is your scarce resource? How do you decide how many hours to work? [LO 1.1] Answer: Your scarce resource is time. You need both time to study and time to work. Presumably, you want to do well in school and also make money. You will try to balance your schedule so that you work as much as possible while still having enough time to study and do well in school. 3. Think about the definition of scarcity that you learned in this chapter. Name three ways that you confront scarcity in your own life. [LO 1.1] Answer: People face scarcity in many aspects of their lives. Some people love to travel and explore new places, so they face scarcity in both time and money that keeps them from traveling as often as they would like. Others face scarcity in their professional life, in that there are often many worthwhile projects to address, but the available resources are limited in terms of employees, time, and budget. 4. When shopping for your interview clothes, what are some trade-offs you face? What is the opportunity cost of buying new clothes? What are the benefits? How do you balance the two? [LO 1.2] Answer: The money you spend on clothes for a job interview could be spent on other things instead, so it is one opportunity cost. Another opportunity cost is the time you spend Chapter 01 - Economics and Life 1-2 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. shopping, which could be spent preparing for your interview or playing Frisbee. The benefits include looking put-together during the interview, which provides a boost to your job prospects. You balance the costs and benefits by accepting costs that are less than (or no greater than) the benefits they provide. 5. You have an 8:30 class this morning but you are feeling extremely tired. How do you decide whether to get some extra sleep or go to class? [LO 1.2] Answer: If you are behaving rationally, you decide by comparing the trade-offs. The opportunity cost of going to class is missing out on some extra sleep. Depending on what else in on your schedule that day (perhaps an important interview), it may make sense to choose extra sleep over class. The opportunity cost of extra sleep is that you will miss the lecture. If your grade will suffer significantly by your absence, you may want to grab some coffee and go to class! 6. It’s Friday night. You already have a ticket to a concert, which cost you $30. A friend invites you to go out for a game of paintball instead. Admission would cost you $25, and you think you’d get $25 worth of enjoyment out of it. Your concert ticket is nonrefundable. What is your opportunity cost (in dollars) of playing paintball? [LO 1.2] Answer: The opportunity cost of going to play paintball is whatever amount of enjoyment (in dollars) you would get out of going to the concert. The $30 you paid for the concert ticket is not relevant to the decision, as it is a sunk cost and is nonrefundable regardless of what you do. 7. Suppose you have two job offers and are considering the trade-offs between them. Job A pays $45,000 per year and includes health insurance and two weeks of paid vacation. Job B pays $30,000 per year; it includes four weeks of paid vacation but no health insurance. [LO 1.2] a. List the benefits of Job A and the benefits of Job B. b. List the opportunity cost of Job A and the opportunity cost of Job B. Answer: a. The benefits of Job A are the extra pay and health insurance. For Job B, the benefit is two extra weeks of vacation. b. The opportunity cost of Job A is losing out on the extra two weeks of vacation that comes with Job B. For Job B, the opportunity costs are the extra $15,000 in salary and the health insurance that come with Job A. Chapter 01 - Economics and Life 1-3 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 8. Your former neighbors gave you their lawnmower when he moved. You are thinking of using this gift to mow lawns in your neighborhood this summer for extra cash. As you think about what to charge your neighbors and whether this idea is worth your effort, what opportunity costs do you need to consider? [LO 1.2] Answer: You need to consider the opportunity cost of your time. Your lawn mowing business would need to cover the opportunity cost of what you could earn in another summer job. You also need to consider the cost of gasoline for the mower and the value of the lawn mower itself. Just because it was a gift does not mean that it has no opportunity cost. The opportunity cost of using the lawnmower for your business is its sale value, if you decide to sell the gift rather than use it yourself. Your lawn mowing business needs to cover all of these costs (the value of your time in another job, gasoline, and the sale value of the lawnmower) in order for it to be a worthwhile endeavor. 9. Think of a few examples of incentives in your daily life. How do you respond to those incentives? [LO 1.3] Answer: An incentive is something that causes people to behave in a certain way by changing the trade-offs they face. No parking signs encourage people not to park in certain places and speed limit signs encourage people not to drive too fast. The consequence in either case is the risk of getting a ticket. The ability to devote a certain percentage of income to a 401(k) retirement account each month before paying taxes encourages people to save for retirement. 10. You supervise a team of salespeople. Your employees already receive a company discount. Suggest a positive incentive and a negative incentive you could use to improve their productivity. [LO 1.3] Answer: For a positive incentive, you could offer a reward such as a bonus, a gift certificate, or an extra discount on company merchandise to the most productive employee of the month. For a negative incentive, you could announce that employees who fail to meet targets will lose their company discount. 11. Your boss decides to pair workers in teams and offer bonuses to the most productive team. Why might your boss offer team bonuses instead of individual bonuses? [LO 1.3] Answer: Your boss is creating a reward system for a project that requires group effort. Even if you are not motivated to compete for an individual bonus, you are likely to feel responsibility to your teammate and make a greater effort to be productive. Your teammate can encourage, pressure, and/or help you to achieve greater productivity. Chapter 01 - Economics and Life 1-4 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 12. Think of a public policy—a local or national law, tax, or public service—that offers an incentive for a particular behavior. Explain what the incentive is, who is offering it, and what they are trying encourage or discourage. Does the incentive work? [LO 1.3] Answer: The U.S. government places a subsidy on growing corn. This provides an incentive for farmers to plant corn on more of their land instead of alternative crops. The government is trying to encourage the production of domestic corn so that the United States can produce corn-based ethanol more cheaply. 13. Why do individuals or firms usually provide the goods and services people want? [LO 1.4] Answer: If firms didn’t produce goods that people want, no one would buy their goods. These firms would lose money and go out of business, and would be replaced by firms that did produce goods that customers want. 14. You may have seen TV advertisements for products or programs that claim to teach a surefire way to make millions on the stock market. Apply the Why isn’t someone already doing it? test to this situation. Do you believe the ads? Why or why not? [LO 1.4] Answer: Guessing which stocks are going to perform well and which are going to tank is a hard, if not impossible, task which makes it very hard to make millions in the stock market. You should not believe the ads for that reason. (If there really was a surefire way to make millions, you can bet everyone would already be doing it!) 15. Describe an innovation in technology, business, or culture that had a major economic impact in your lifetime. [LO 1.4] Answer: The Internet has completely changed the way people do business. While writing this textbook, we have collaborated with people all over the country, sharing documents online that we once would have had to send through the mail. 16. Why do people confuse correlation with causation? [LO 1.5] Answer: Correlation means that two events occur together. Since the two often occur together, people often believe that one causes the other, but this is not always true. People once thought that ice cream caused polio, for example. The real relationship was that people ate more ice cream in the summer, and this also happened to be the time of year that the polio virus spread more rapidly. Chapter 01 - Economics and Life 1-5 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 17. Name two things that are positively correlated and two things that are negatively correlated. [LO 1.5] Answer: Events that are positively correlated tend to occur together, or move in the same direction. For example, more people tend to carry an umbrella when the risk of rain is high. When one event increases at the same time a related event decreases, then the two events are negatively correlated. According to auto insurers, good grades and the risk of getting in a car accident are negatively correlated. (People with higher grades tend to be safer drivers.) 18. Why is it important for a good economic model to predict cause and effect? [LO 1.6] Answer: A good model must predict cause and effect so that it can explain something about what we have observed and can help us anticipate what will happen in future observations. 19. Why is it important for a good economic model to make clear assumptions? [LO 1.6] Answer: A good model must make clear assumptions so we know when the model will do a good job at explaining or predicting our observations and when it will not. 20. What is the difference between disagreeing about a positive statement and disagreeing about a normative statement? [LO 1.7] Answer: A positive statement is something that is supposed by fact, whereas a normative statement is a value judgment. So disagreeing with a normative statement means you disagree with someone’s opinion. Disagreeing with a positive statement means disputing the truth of fact. 21. Would a good economic model be more likely to address a positive statement or a normative statement? Why? [LO 1.7] Answer: A good model predicts cause and effect and can be tested with evidence. Thus, positive statements are more likely to be addressed by a good model. 22. Write a positive statement and a normative statement about your favorite hobby. [LO 1.7] Answer: Positive statements are based on fact: For example, "Cultures around the world use food to convey social values." Normative statements are based on opinion: For example, "Food is the best way to understand the social values of a culture." Chapter 01 - Economics and Life 1-6 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Problems and Applications 1. Think about how and why goods and resources are scarce. Goods and resources can be scarce for reasons that are inherent to their nature at all times, that are temporary or seasonal, or that are artificially created. Separate the goods listed below into two groups; indicate which (if any) are artificially scarce (AS) and which (if any) are inherently scarce (IS). [LO 1.1] a. Air of any quality b. Land c. Patented goods d. Original Picasso paintings Answer: Goods and resources can be inherently scarce at all times if there is a limited or finite supply of the resource, or artificially scarce when access to the resource is restricted. a. Not scarce. Air (of any quality) is abundant and need not be rationed through prices or some other allocation mechanism. b. Inherently scarce. Land is finite in supply; land is available for development, but no new land can be created. c. Artificially scarce. Patented goods are scarce by law; only the patent holder may supply these goods. d. Inherently scarce. Original Picasso paintings are finite; no new Picasso’s can be created beyond those that currently exist. 2. You are looking for a new apartment in Manhattan. Your income is $4,000 per month, and you know that you should not spend more than 25 percent of your income on rent. You have come across the listings for one-bedroom apartments shown in Table 1P-1. You are indifferent about location, and transportation costs are the same to each neighborhood. [LO 1.1] a. Which apartments fall within your budget? b. Suppose that you adhere to the 25 percent guideline but also receive a $1,000 cost-ofliving supplement because you are living and working in Manhattan. Which apartments fall within your budget now? Answer: Chapter 01 - Economics and Life 1-7 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. a. Delancey. Your income and income guidelines represent a constraint on the choices available. Under these guidelines, 25 percent of your monthly income is $1,000. So the only apartment you can afford within your budget is Delancey, at $950. All others are unattainable to you. b. Chelsea and Delancey. The $1,000 monthly cost-of-living supplement expands your set of living options. Your income is now effectively $5,000 per month, so you can afford any apartment that costs $1,250 or less (25 percent of $5,000). These choices now include Chelsea ($1,200) and Delancey ($950). 3. Suppose the price of a sweater is $26. Jaylen’s benefit from purchasing each additional sweater is given in the Table 1P-2. He gets the most benefit from the first sweater and less benefit from each additional sweater. If Jaylen is behaving rationally, how many sweaters will he purchase? [LO 1.2] Answer: Jaylen will purchase all of the sweaters for which the marginal benefit is greater than the marginal cost. If the price of a sweater is $26, this is the marginal cost, as each additional sweater will cost $26. For the first four sweaters, the marginal benefit exceeds the marginal cost, so Jaylen will purchase four sweaters. For the fifth sweater, the marginal cost of $26 exceeds the marginal benefit. Marginal Benefit Marginal Cost 1 st sweater $60 $26 2 nd sweater $45 $26 3 rd sweater $40 $26 4 th sweater $33 $26 5 th sweater $22 $26 6 th sweater $18 $26 4. Sweaters sell for $15 at the crafts fair. Allie knits sweaters; her marginal costs are given in the Table 1P-3. Allie’s costs increase with each additional sweater. If Allie is behaving rationally, how many sweaters will she sell? [LO 1.2] Chapter 01 - Economics and Life 1-8 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: Allie will sell all of the sweaters for which the marginal benefit is greater than the marginal cost. If the price of a sweater is $15, this is the marginal benefit, as Allie will receive $15 for each additional sweater she sells. For the first 3 sweaters, the marginal benefit exceeds the marginal cost, so Allie will sell 3 sweaters. Marginal Cost 1 st sweater $5 2 nd sweater $8 3 rd sweater $12 4 th sweater $18 5 th sweater $25 6 th sweater $32 5. Last year, you estimated you would earn $5 million in sales revenues from developing a new product. So far, you have spent $3 million developing the product, but it is not yet complete. Meanwhile, this year you have new sales projections that show expected revenues from the new product will actually be only $4 million. How much should you be willing to spend to complete the product development? [LO 1.2] a. $0. b. Up to $1 million. c. Up to $4 million. d. Whatever it takes. Answer: You should spend up to $4 million. The $3 million you have spent already is a sunk cost and cannot be recovered. Therefore, the $3 million you have spent is irrelevant to the decision of how much to spend going forward. This year, the relevant decision is: How much are you willing to spend to have $4 million in revenue? If you had known that product development may cost you more than you will gain in revenues, you should not have started this project. But at this point, by thinking on the margin, you can see that you should be willing to move forward as long as the costs of going forward are not greater than the benefits of going forward ($4 million). 6. Consider the following examples. For each one, say whether the incentive is positive or negative. [LO 1.3] Chapter 01 - Economics and Life 1-9 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. a. Bosses who offer time-and-a-half for working on national holidays. b. Mandatory minimum sentencing for drug offenses. c. Fines for littering. d. Parents who offer their children extra allowance money for good grades. Answer: A positive incentive like bonus compensation or monetary awards makes people more likely to do something. A negative incentive like fines, incarceration, and taxes makes them less likely to do something. a. Positive. b. Negative. c. Negative. d. Positive. 7. Consider the following events that change prices as described in Table 1P-4. For each one, say whether the opportunity cost of consuming the affected good increases or decreases. [LO 1.3] Answer: a. Decreases. b. Increases. c. Increases. d. Decreases. 8. Your best friend has an idea for a drive-through bar. Indicate the best explanation for why others have not taken advantage of her idea: true innovation, market failure, government intervention, or unprofitablity. [LO 1.4] Answer: Government intervention. In most places, drive-thru bars are (wisely) illegal. 9. Your best friend has an idea for a long-distance car service to drive people across the country. Indicate the best explanation for why others have not taken advantage of her idea: true innovation, market failure, intervention, or unprofitablity. [LO 1.4] Answer: Unprofitable. There are alternatives for customers that can be cheaper than car service. For example, buses can offer cheaper prices than a car service could. While a car is Chapter 01 - Economics and Life 1-10 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. less costly to operate than a bus, a bus can more than make up the difference in operation cost by accommodating many more passengers. 10. Determine whether each of the following questionable statements is best explained by coincidence, an omitted variable, or reverse causation. [LO 1.5] a. In cities that have more police, crime rates are higher. b. Many retired people live in states where everyone uses air conditioning during the summer. c. More people come down with the flu during the Winter Olympics than during the Summer Olympics. d. For the last five years, Punxsutawney Phil has seen his shadow on Groundhog Day, and spring has come late. Answer: a. Reverse causation: Cities with higher crime rates will tend to have larger police departments. b. Omitted variable: Having a large number of retired people live in a state does not cause everyone to use their air conditioner. Retired people tend to move to warmer states and living in a warm-weather state causes everyone to use air conditioning in the summer. c. Omitted variable: The Winter Olympics do not cause the flu. The flu season falls during Winter months, which increases the incidence of flu cases at the Winter Olympics vs. the Summer (correlation without causation). d. Coincidence: There is no plausible cause-and-effect relationship here. 11. For each of the pairs below, determine whether they are positively correlated, negatively correlated, or uncorrelated. [LO 1.5] a. Time spent studying and test scores. b. Vaccination and illness. c. Soft drink preference and music preference. d. Income and education. Answer: Two items are positively correlated if both variables increase at the same time, or if both variables decrease at the same time. Two items are negatively correlated if one is increasing while the other is decreasing, or vice versa. a. Positively correlated. More time spent studying tends to lead to higher test scores. b. Negatively correlated. More vaccinations result in less illness. c. Uncorrelated. These preferences are not related in any predictable way. d. Positively correlated. People who earn higher income tend to have higher levels of education. Chapter 01 - Economics and Life 1-11 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 12. Each statement below is part of an economic model. Indicate whether the statement is a prediction of cause and effect or an assumption. [LO 1.6] a. People behave rationally. b. If the price of a good falls, people will consume more of that good. c. Mass starvation will occur as population outgrows the food supply. d. Firms want to maximize profits. Answer: a. Assumption. This is an assumption about how people behave. b. Prediction of cause and effect. This is a prediction of cause and effect because the decline in the price of the good will tend to cause people to consume more of the good, all else the same. One event leads to another. c. Prediction of cause and effect. This is a prediction of cause and effect because if population growth results in the demand for food exceeding the available supply of food, then mass starvation may occur. One event leads to another. d. Assumption. This is an assumption about how firms behave. 13. From the list below, select the characteristics that describe a good economic model. [LO 1.6] a. Includes every detail of a given situation. b. Predicts that A causes B. c. Makes approximately accurate assumptions. d. Fits the real world perfectly. e. Predicts things that are usually true. Answer: A good model should predict cause and effect (b), describe the world accurately (c), and state its assumptions clearly (e). Economists test their models by observing what happens in the world and collecting data that can be used to support or reject their models. 14. Determine whether each of the following statements is positive or normative. (Remember that a positive statement isn’t necessarily correct; it just makes a factual claim rather than a moral judgment.) [LO 1.7] a. People who pay their bills on time are less likely than others to get into debt. b. Hard work is a virtue. c. Everyone should pay his or her bills on time. d. China has a bigger population than any other country in the world. e. China’s One-Child Policy (which limits families to one child each) helped to spur the country’s rapid economic growth. f. Lower taxes are good for the country. Chapter 01 - Economics and Life 1-12 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: A statement that makes a factual claim about how the world actually works is called a positive statement. A statement that makes a claim about how the world should be is called a normative statement. Economics is a field in which people frequently confuse positive statements with normative statements. However, you do not have to adopt a particular moral or political point of view to use economic concepts and models. a. Positive b. Normative c. Normative d. Positive e. Positive f. Normative 15. You just received your midterm exam results and your professor wrote the following note: “You received a 70 on this exam, the average score. If you want to improve your grade, you should study more.” Evaluate your professor’s note. [LO 1.7] a. Is the first sentence positive or normative? b. Is the second sentence positive or normative? Answer: A statement that makes a factual claim about how the world actually works is called a positive statement. A statement that makes a claim about how the world should be is called a normative statement. Economics is a field in which people frequently confuse positive statements with normative statements. However, you do not have to adopt a particular moral or political point of view to use economic concepts and models. a. Positive b. Normative Chapter 02 - Specialization and Exchange 2-1 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CHAPTER 2 SPECIALIZATION AND EXCHANGE Solutions to End-of-Chapter Questions and Problems Review Questions 1. You’ve been put in charge of a bake sale for a local charity, at which you are planning to sell cookies and cupcakes. What would a production possibilities graph of this situation show? [LO 2.1] Answer: On one axis, the production possibilities graph would show the total number of cookies you could bake if you spent all of your time and resources baking cookies. The other axis would show the total amount of cupcakes you could bake if you spent all of your time and resources baking cupcakes. The two endpoints would be connected by a downwardsloping line. The slope of this line would represent the tradeoff (opportunity cost) you face between baking cookies and baking cupcakes. If you bake more cupcakes, you must bake fewer cookies. The production possibilities graph would show all of the combinations of cookies and cupcakes you could produce with your time and resources. 2. You manage two employees at a pet salon. Your employees perform two tasks, giving flea baths and grooming animals. If you constructed a single production possibilities frontier for flea baths and grooming that combined both of your employees’ work efforts, would you expect the production possibilities frontier to be linear (a straight line)? Explain why or why not. [LO 2.1] Answer: You would not expect a production possibilities frontier that combined both of your employees' work efforts to be linear. Each worker would likely differ in her relative skills at grooming and giving flea baths and would therefore differ in the opportunity cost for performing each task. 3. You and another volunteer are in charge of a bake sale for a local charity, at which you are planning to sell cookies and cupcakes. [LO 2.2] a. What would it mean for one of you to have an absolute advantage at baking cookies or cupcakes? Could one of you have an absolute advantage at baking both items? b. What would it mean for you or the other volunteer to have a comparative advantage at baking cookies or cupcakes? Could one of you have a comparative advantage at baking both items? Chapter 02 - Specialization and Exchange 2-2 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: a. If you have an absolute advantage in the production of cupcakes (or cookies), it means that you can produce more cupcakes (or cookies) in total with the same amount of resources than the other volunteer. Absolute advantage is about having greater productivity. You could have an absolute advantage in baking both cupcakes and cookies if you are more productive in both goods than the other volunteer. b. If you had a comparative advantage in baking cookies, it would mean that you have a lower opportunity cost (you give up fewer cupcakes for each cookie you bake) than the other volunteer. It is not possible for you to have a comparative advantage in baking both goods. If you have a comparative advantage in baking cookies, the other volunteer will have a comparative advantage in baking cupcakes. 4. You and another volunteer are in charge of a bake sale for a local charity, at which you are planning to sell cookies and cupcakes. Suppose you have a comparative advantage at baking cookies, and the other volunteer has a comparative advantage at baking cupcakes. Make a proposal to the volunteer about how to split up the baking. Explain how you can both gain from specializing, and why. [LO 2.3] Answer: If you have a comparative advantage in baking cookies and the other volunteer has a comparative advantage in baking cupcakes, then you should specialize in baking cookies and the other volunteer should specialize in baking cupcakes. If you spend all of your time baking cookies and the other volunteer spends all of his time baking cupcakes, you will wind up with more cookies and cupcakes between you than you would have if you each spent half of your time baking each good. 5. At the flower shop, where you manage two employees, your employees perform two tasks: caring for the displays of cut flowers and making flower arrangements to fill customer orders. Explain how you would approach organizing your employees and assigning them tasks. [LO 2.3] Answer: You would have your employees specialize in the task for which they have the lowest opportunity cost. The worker who has the lower opportunity cost of caring for the displays should switch to filling customer orders only if there are orders left to complete after all the cut flowers have been cared for (water changed, old blooms removed, etc.). You would assign making floral arrangements to fill customer orders to the worker who has the comparative advantage in that task. This worker should fill customer orders and switch to caring for the cut flower displays only if there is such work left to complete after customer orders have been filled. 6. Suppose two countries produce the same two goods and have identical production possibilities frontiers. Do you expect these countries to trade? Explain why or why not. [LO 2.4] Chapter 02 - Specialization and Exchange 2-3 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: We would not expect countries with the same production possibilities frontiers to trade. Identical production possibilities frontiers would indicate that the two countries faced the same opportunity costs. The basis for gains from trade is specializing according to differing opportunity costs. 7. Brazil is the largest coffee producer in the world, and coffee is one of Brazil’s major export goods. Suppose that in 20 years, Brazil no longer produces much coffee and imports most of its coffee instead. Explain why Brazil might change its trade pattern over time. [LO 2.4] Answer: Brazil would change from exporting to importing coffee if its comparative advantage changes. Over time, Brazil could lose its comparative advantage in coffee if its opportunity costs for growing coffee increase. If this were the case, we would expect Brazil to gain a comparative advantage elsewhere. Problems and Applications 1. Your friend Sam owns a catering business and has been asked to prepare appetizers for a university reception during homecoming weekend. She has an unlimited amount of ingredients but only six hours to prepare them. Sam can make 300 mini-sandwiches or 150 servings of melon slices topped with smoked salmon and a dab of sauce per hour. [LO 2.1] a. Draw Sam’s production possibilities frontier. b. Now suppose that the university decides to postpone the reception until after the big game, so Sam has an extra four hours to prepare. Redraw her production possibilities frontier to show the impact of this increase in resources. c. Now, in addition to the extra time to prepare, suppose Sam’s friend Chris helps by preparing the melon slices. Sam can now make 300 mini-sandwiches or 300 melon appetizers per hour. Redraw Sam’s production possibilities frontier to show the impact of increased productivity in making melon appetizers. Answer: Chapter 02 - Specialization and Exchange 2-4 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. a. 300 mini-sandwiches/hr = 1,800 mini-sandwiches in 6 hours. This is the endpoint on the Y-axis. 150 melon appetizers/hr = 900 melon appetizers in 6 hours. This is the endpoint on the X-axis. b. 300 mini-sandwiches/hr = 3,000 mini-sandwiches in 10 hours. This is the endpoint on the Y-axis. 150 melon appetizers/hr = 1,500 melon appetizers in 10 hours. This is the endpoint on the X-axis. c. 300 mini-sandwiches/hr = 3,000 mini-sandwiches in 10 hours. This is the endpoint on the Y-axis. 300 melon appetizers/hour = 3,000 melon appetizers in 10 hours. This is the endpoint on the X-axis. 2. Your friend Sam has been asked to prepare appetizers for the university reception. She has an unlimited amount of ingredients and six hours in which to prepare them. Sam can make 400 mini-sandwiches or 200 servings of melon slices topped with smoked salmon and a dab of sauce per hour. [LO 2.1] a. What is Sam’s opportunity cost of making one mini-sandwich? b. What is Sam’s opportunity cost of making one melon appetizer? c. Suppose the reception has been postponed, so Sam has an extra four hours to prepare. What is the opportunity cost of making one mini-sandwich now? d. Suppose the reception has been postponed, so Sam has an extra four hours to prepare. What is the opportunity cost of making one melon appetizer now? Chapter 02 - Specialization and Exchange 2-5 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. e. Suppose Sam’s friend Chris helps by preparing the melon slices, increasing Sam’s productivity to 400 mini-sandwiches or 400 melon appetizers per hour. What is the opportunity cost of making one mini-sandwich now? f. Suppose Sam’s friend Chris helps by pre-paring the melon slices, increasing Sam’s productivity to 400 mini-sandwiches or 400 melon appetizers per hour. What is the opportunity cost of making one melon appetizer now? Answer: The opportunity cost is the value of what you have to give up in order to get something. It is the value of your next-best alternative. a. To make 1 more mini-sandwich you have to give up 1/2 melon appetizer. b. To make 1 more melon appetizer you have to give up 2 mini-sandwiches. c. To make 1 more mini-sandwich you still have to give up 1/2 melon appetizer. The opportunity cost has not changed. d. To make 1 more melon appetizer you still have to give up 2 mini-sandwiches. e. To make 1 more mini-sandwich you have to give up 1 melon appetizer. The opportunity cost has changed. f. To make 1 more melon appetizer you have to give up 1 mini-sandwich. 3. Suppose that Canada produces two goods: lumber and fish. It has 18 million workers, each of whom can cut 10 feet of lumber or catch 20 fish each day. [LO 2.1] a. What is the maximum amount of lumber Canada could produce in a day? b. What is the maximum amount of fish it could produce in a day? c. Draw Canada’s production possibilities frontier. d. Use your graph to determine how many fish can be caught if 60 million feet of lumber are cut. Answer: a. The maximum amount of lumber Canada could produce in a day is 10 feet x 18 million workers = 180 million feet. b. The maximum amount of fish Canada could produce in a day is 20 fish x 18 million workers = 360 million fish. c. The two endpoints of the PPF are (0,180) and (360,0), as shown in the graph below. Chapter 02 - Specialization and Exchange 2-6 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. d. The opportunity cost of producing 1 foot of lumber is 2 fish. Therefore, the opportunity cost of producing 60 million feet of lumber is 120 million fish. If Canada produces 60 million feet of lumber, then it can only produce 360 - 120, or 240 million fish. 4. The graph in Figure 2P-1 shows Tanya’s weekly production possibilities frontier for doing homework (writing papers and doing problem sets). [LO 2.1] a. What is the slope of the production possibilities frontier? b. What is the opportunity cost of doing one problem set? c. What is the opportunity cost of writing one paper? Answer: a. The slope of the production possibilities frontier is -(6/2) = -3. b. The opportunity cost of doing one problem set is (2 papers/6 problems sets) = 1/3 paper. Chapter 02 - Specialization and Exchange 2-7 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. c. The opportunity cost of writing one paper is (6 problems sets/2 papers) = 3 problems sets. 5. Use the production possibilities frontier in Figure 2P-2 to answer the following questions. [LO 2.1] a. What is the slope of the PPF between point A and point B? b. What is the slope of the PPF between point B and point C? c. Is the opportunity cost of producing hammers higher between points A and B or between points B and C? d. Is the opportunity cost of producing screwdrivers higher between points A and B or between points B and C? Answer: a. The slope of the production possibilities frontier between Point A and Point B is -(5/1) = -5. b. The slope of the production possibilities frontier between Point B and Point C is -(10/1) = -10. c. The opportunity cost of producing hammers is lower between points A and B (5 hammers) than between points B and C (10 hammers). d. The opportunity cost of producing screwdrivers is higher between points A and B (1/5 screwdriver) than between points B and C (1/10 screwdriver). 6. For each point on the PPF in Figure 2P-3, note whether the point is attainable and efficient, attainable and inefficient, or unattainable. [LO 2.1] Chapter 02 - Specialization and Exchange 2-8 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: Points that lie on the frontier are called efficient, because they squeeze the most output possible from all available resources. Points within (inside) the frontier are inefficient because they do not use all available resources. Points outside the frontier are unattainable with current resources. a. Attainable and efficient b. Unattainable c. Attainable and inefficient d. Attainable and efficient. 7. For each point on the PPF in Figure 2P-4, note whether the point is attainable and efficient, attainable and inefficient, or unattainable. [LO 2.1] Answer: Points that lie on the frontier are called efficient, because they squeeze the most output possible from all available resources. Points within (inside) the frontier are inefficient because they do not use all available resources. Points outside the frontier are unattainable with current resources. Chapter 02 - Specialization and Exchange 2-9 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. a. Attainable and efficient b. Attainable and efficient c. Attainable and efficient d. Attainable and inefficient e. Unattainable 8. The Red Cross and WIC (Women, Infants, and Children program) both provide emergency food packages and first-aid kits to New York City home-less shelters. Table 2P-1 shows their weekly production possibilities in providing emergency goods to NYC homeless shelters. NYC homeless shelters need a total of 20 first-aid kits per week. Currently, they get 10 kits from the Red Cross and 10 kits from WIC. With their remaining resources, how many food packages can each organization provide to NYC homeless shelters? [LO 2.1] Answer: From the table, we find that the Red Cross can produce 300 food packages OR 50 first-aid kits OR some combination in-between (for example, 150 food packages and 25 firstaid kits.) The opportunity cost of providing one first-aid kit is 6 food packages. The requirement of 10 kits from the Red Cross comes at a cost of 60 food packages (6 food packages per first-aid kit times 10). Out of the 300 food packages possible from the Red Cross 60 must be given up, leaving 240 (300 – 60) food packages available. Likewise, the WIC can produce 200 food packages OR 20 first-aid kits OR some combination in-between. The opportunity cost for this organization of providing one first-aid kit is 10 food packages. The requirement of 10 first-aid kits from the WIC means giving up 100 food packages. Out of the 200 food packages possible, 100 (200 – 100) are still available. 9. Suppose that three volunteers are preparing cookies and cupcakes for a bake sale. Diana can make 26 cookies or 19 cupcakes per hour; Andy can make 24 cookies or 18 cupcakes; and Sam can make 9 cookies or 13 cupcakes. [LO 2.2] a. Who has the absolute advantage at making cookies? b. Who has the absolute advantage at making cupcakes? Answer: If a producer can generate more output than others with a given amount of resources, that producer has an absolute advantage. When a producer can make a good at a Chapter 02 - Specialization and Exchange 2-10 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. lower opportunity cost than other producers, we say it has a comparative advantage at producing that good. a. Of the three workers, Diana has the absolute advantage at making cookies. She can make the most cookies (26) in an hour compared with Andy (24) and Sam (9). b. Diana also has the absolute advantage at baking cupcakes. She can bake 19 cupcakes in an hour, whereas Andy can only bake 18 and Sam can only bake 13. 10. Paula and Carlo are coworkers. Their production possibilities frontiers for counseling clients and writing memos are given in Figure 2P-5. [LO 2.2] a. Which worker has an absolute advantage in counseling clients? b. Which worker has a comparative advantage in counseling clients? c. Which worker has an absolute advantage in writing memos? d. Which worker has a comparative advantage in writing memos? Answer: Absolute advantage is the ability to produce more of a good or service than others can with a given amount of resources. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others. a. Paula has the absolute advantage in counseling clients because she can produce more of this service than Carlo can with a given amount of resources. b. Paula has the comparative advantage in counseling clients because her opportunity cost of counseling a client is 0.25 memos compared to Carlo's opportunity cost of 0.33 memos. Chapter 02 - Specialization and Exchange 2-11 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. c. Paula has the absolute advantage in writing memos because she can write more of them than Carlo can with a given amount of resources. d. Carlo has the comparative advantage in writing memos because his opportunity cost of writing a memo is 3 counseled clients compared to Paula's opportunity cost of 4 counseled clients. 11. Two students are assigned to work together on a project that requires both writing and an oral presentation. Steve can write 1 page or prepare 4 minutes of a presentation each day. Anna can write 3 pages or prepare 2 minutes of a presentation each day. [LO 2.2] a. Who has a comparative advantage at writing? b. Suppose that Steve goes to a writing tutor and learns some tricks that enable him to write 3 pages each day. Now who has a comparative advantage at writing? Answer: Absolute advantage is the ability to produce more of a good or service than others can with a given amount of resources. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others. a. Anna has a comparative advantage at writing because she has the lower opportunity cost. She gives up 0.67 minutes of presentation for each page she writes, whereas Steve gives up 4 minutes of presentation for each page he writes. b. If Steve goes to a writing tutor and increases his productivity in writing, his opportunity costs change. If Steve is now able to write 4 pages a day, it means his opportunity cost for each page he writes is now 1 minute of presentation. However, Anna still has a comparative advantage at writing because she still only gives up 0.67 minutes of presentation for each page he writes. 12. Suppose that the manager of a restaurant has two new employees, Rahul and Henriette, and is trying to decide which one to assign to which task. Rahul can chop 20 pounds of vegetables or wash 100 dishes per hour. Henriette can chop 30 pounds of vegetables or wash 120 dishes. [LO 2.3] a. Who should be assigned to chop vegetables? b. Who should be assigned to wash dishes? Answer: Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others. a. Henriette should chop vegetables, as she has the lower opportunity cost for chopping vegetables. Henriette’s opportunity cost for chopping 1 vegetable is a loss of 4 dishes washed, whereas Rahul’s opportunity cost for chopping 1 vegetable is a loss of 5 dishes washed. Chapter 02 - Specialization and Exchange 2-12 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. b. Rahul should be assigned to wash dishes, as she has the lowest opportunity cost for washing dishes. Rahul’s opportunity cost for washing 1 dish is a loss of 0.2 vegetables chopped, whereas Henriette’s opportunity cost for washing 1 dish is a loss 0.25 vegetables chopped. 13. The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 20,000 tons of coffee per year or 10,000 barrels of rum. Nicaragua can produce 30,000 tons of coffee per year or 5,000 barrels of rum. [LO 2.3] a. Suppose the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in the production of either coffee or rum. Which country should specialize in producing coffee? Which country should specialize in producing rum? b. What are the minimum and maximum prices at which these countries will trade coffee? Answer: a. If the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in production, coffee and rum will be produced according to which country has a comparative advantage in the production of each good. Comparing their opportunity costs for producing coffee, we see that Nicaragua has a lower opportunity cost for producing coffee (1/6 of a barrel of rum, versus the Dominican Republic's opportunity cost of 1/2 barrel of rum). Nicaragua, therefore, should specialize in coffee. Comparing their opportunity costs for producing rum, we see that the Dominican Republic has a lower opportunity cost for producing rum (2 tons of coffee, versus 6 tons for Nicaragua). The Dominican Republic, therefore, should specialize in rum. b. The minimum price at which these countries will trade coffee is 1/6 (0.167) of a barrel of rum per ton of coffee and the maximum price is 1/2 (0.500) of a barrel of rum per ton of coffee. The price of coffee will end up between the opportunity costs for the two countries. Nicaragua specializes in coffee because it has the lower opportunity cost (1/6 as compared to 1/2). It will not sell coffee for less than its opportunity cost. The Dominican Republic will not pay more than its opportunity cost (1/2) because if the price of coffee was higher than 1/2 of a barrel of rum, then it would be better off producing the coffee itself. 14. Eleanor and her little brother Josh are responsible for two chores on their family’s farm: gathering eggs and collecting milk. Eleanor can gather 9 dozen eggs or collect 3 gallons of milk per week. Josh can gather 2 dozen eggs or collect 2 gallons of milk per week. [LO 2.3] a. The family wants 2 gallons of milk per week and as many eggs as the siblings can gather. Currently, Eleanor and Josh collect one gallon of milk each and as many eggs as they can. How many dozens of eggs does the family have per week? Chapter 02 - Specialization and Exchange 2-13 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. b. If the siblings were to specialize, which should collect the milk? c. If the siblings were to specialize, how many dozens of eggs would the family have per week? Answer: Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others. a. Eleanor’s opportunity cost for collecting a gallon of milk is 3 dozen eggs. Therefore Eleanor will gather 9 ‒ 3 = 6 dozen eggs. Josh’s opportunity cost for collecting a gallon of milk is 1 dozen eggs. Therefore, Josh will gather 2 ‒ 1 = 1 dozen eggs. Together the siblings will gather 7 dozen eggs. b. Josh should specialize in collecting milk because he has the lower opportunity cost. c. If they specialize, Josh will collect both gallons of milk and no eggs. Eleanor will collect 9 dozen eggs and no milk. The family will now have 9 dozen eggs with their 2 gallons of milk, more than they were able to have before the siblings specialized. 15. Suppose Russia and Sweden each produces only paper and cars. Russia can produce 8 tons of paper or 4 million cars each year. Sweden can produce 25 tons of paper or 5 million cars each year. [LO 2.4] a. Draw the production possibilities frontier for each country. b. Both countries want 2 million cars each year and as much paper as they can produce along with 2 million cars. Find this point on each production possibilities frontier and label it “A.” c. Suppose the countries specialize. Which country will produce cars? d. Once they specialize, suppose they work out a trade of 2 million cars for 6 tons of paper. Find the new consumption point for each country and label it “B.” Answer: a. The production possibilities frontier identifies the different combinations of the two goods (cars and paper) that can be produced by each country. Russia can produce 8 tons of paper and 0 cars or 0 tons of paper and 4 million cars. These are the two endpoints of Russia's PPF. Sweden can produce 25 tons of paper and 0 cars or 0 tons of paper and 5 million cars. These are the two endpoints of Sweden's PPF. b. If Russia wants to produce 2 million cars then they are only able to produce 4 tons of paper. If Sweden wants to produce 2 million cars then they are only able to produce 15 tons of paper. Notice Russia's opportunity cost of producing 1 million cars is 2 tons of paper, and Sweden's opportunity cost of producing 1 million cars is 5 tons of paper Chapter 02 - Specialization and Exchange 2-14 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. c. Russia will produce cars because Russia has a lower opportunity cost for producing cars than Sweden. d. Russia will produce 4 million cars (complete specialization is assumed) and trade 2 million cars to Sweden in exchange for 6 tons of paper. Therefore, Russia ends up consuming 2 million cars and 6 tons of paper. Sweden will produce 25 tons of paper and trade 6 tons of paper to Russia in exchange for 2 million cars. Therefore, Sweden ends up consuming 2 million cars and 19 tons of paper. Both counties are better of with trade because they still have 2 million cars each, but both end up with more paper than they had before trade. Notice the post-trade consumption point is outside the production possibilities frontier meaning each country was unable to achieve this point without trade. 16. Maya and Max are neighbors. They both grow lettuce and tomatoes in their gardens. Maya can grow 45 heads of lettuce or 9 pounds of tomatoes this summer. Max can grow 42 heads of lettuce or 6 pounds of tomatoes this summer. If Maya and Max specialize and trade, the price of tomatoes (in terms of lettuce) would be as follows: 1 pound of tomatoes would cost between __ and __ heads of lettuce. Answer: If Maya and Max specialize and trade, the price of tomatoes (in terms of lettuce) would be: 1 pound of tomatoes would cost between 5 and 7 heads of lettuce. Maya will grow tomatoes because she has the lower opportunity cost. (Maya’s opportunity cost is 5 heads of lettuce for 1 pound of tomatoes, whereas Max’s is 7 heads of lettuce for 1 pound of tomatoes.) She must receive at least 5 heads of lettuce from Max for a pound of tomatoes or she is better off growing the lettuce herself. Max will buy tomatoes from Maya but only if she charges him no more than 7 heads of lettuce. Otherwise, Max is better off growing the tomatoes himself. If, for example, Maya charges Max 6 heads of lettuce for a pound of tomatoes both neighbors would be better off than what they can do on their own. Chapter 03 - Markets 3-1 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CHAPTER 3 MARKETS Solutions to End-of-Chapter Questions and Problems Review Questions 1. Think about a competitive market in which you participate regularly. For each of the characteristics of a competitive market, explain how your market meets these requirements. [LO 3.1] Answer: The market for eggs is competitive. There are many grocery stores where eggs can be purchased. Standardized good: Eggs are a standardized good. There are different kinds of eggs, of course, but each unit of a particular type of egg will be standardized. Full information: The ubiquity of grocery stores makes it easy for buyers and sellers to gather information about the price of eggs. No transaction costs: There are no transaction costs or other limits to buying and selling eggs. Buyers and sellers can easily find each other. Participants are price takers: I am one consumer among many and my purchase patterns have no effect on the market price. Likewise, there are so many places to buy eggs that sellers are also price takers. 2. Think about a noncompetitive market in which you participate regularly. Explain which characteristic(s) of competitive markets your market does not meet. [LO 3.1] Answer: I take the subway to work every day. Public transportation is not a competitive market. There is only one subway system, so there is no competition. The subway is a natural monopoly (students will learn about monopolies in a later chapter). For now, it is enough to know that without competition, the MTA (Metropolitan Transportation Authority)—which which operates the subway system—is not a price taker. The passengers are certainly price takers, but the operator is not. 3. Explain why a demand curve slopes downward. [LO 3.2] Answer: The demand curve slopes downward because as prices increase, quantity demanded decreases. Price and quantity move in opposite directions and have a negative relationship for demand. Think about your incentives when the price of a good you want to purchase increases. The quantity you demand of that good is likely to move in the other direction and decrease. When price and quantity move in opposite directions, the result is a downward sloping curve. Chapter 03 - Markets 3-2 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 4. In each of the following examples, name the factor that affects demand and describe its impact on your demand for a new cell phone. [LO 3.2] a. You hear a rumor that a new and improved model of the phone you want is coming out next year. b. Your grandparents give you $500. c. A cellular network announces a holiday sale on a data package that includes the purchase of a new smartphone. d. A friend tells you how great his new phone is and suggests that you get one, too. Answer: a. Expectations. Your current demand will decrease in the present as you postpone purchasing under the expectation that a new model will be released next year. b. Incomes. Your purchasing power has increased due to the money given to you by your grandparents. Your demand will increase. c. Price of a Related Good. When the price of a data package (a complementary good) goes down due to the sale, demand for smartphones increases. d. Consumer Preferences. Your friend influences your interest in purchasing a phone. Your friend’s enjoyment of his phone and suggestion that you also purchase a phone increases your demand. 5. Consider the following events: a. The price of cell phones goes down by 25 percent during a sale. b. You get a 25 percent raise at your job. Which event represents a shift in the demand curve? Which represents a movement along the curve? What is the difference? [LO 3.3] Answer: The relationship between price and quantity demanded is directly reflected in the demand curve. A change in price will mean a movement along an existing curve. Factors of demand that are held constant, such as income, cause a shift in the demand curve when they change. a. When the price of cell phones goes down by 25 percent, this is a movement along the demand curve for cell phones. b. When your income increases by 25 percent, there is a shift in the demand curve, as income is a factor of demand held constant in any given demand curve. 6. What is the difference between a change in demand and a change in quantity demanded? [LO 3.3] Chapter 03 - Markets 3-3 © 2021 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answer: When we refer to a change in demand, we are referring to a shift of the entire curve. This happens when a non-price factor changes—such as income, expectations, prices of related goods, consumer preferences or the number of buyers. A change in quantity demanded refers to a change in the specific numerical quantity demanded due to a change in price. 7. Explain why a supply curve slopes upward. [LO 3.4] Answer: The supply curve slopes upward because as prices increase, quantity supplied also increases. Price and quantity move in the same direction and have a positive relationship for supply. Think about the incentives facing a producer when the price of the good she is producing increases. The quantity she is willing and able to supply of that good is likely to also increase. When price and quantity move in the same direction, the result is an upward sloping curve. 8. In each of the following examples, name the factor that affects supply and describe its impact on the supply of cell phones. [LO 3.4] a. Economic forecasts suggest that the demand for cell phones will increase in the future. b