SOLUTIONS MANUAL
MODERN PRINCIPLES OF ECONOMICS
6TH EDITION
CHAPTER NO. 01: THE BIG IDEAS
FACTS AND TOOLS
1. A headline in the New York Times read, “Study Finds Enrollment Is Up at Colleges Despite
Recession.” How would you rewrite this headline now that you understand the idea of opportunity
cost?
Solution
1. The easiest change is to switch “despite” to “because of.” Ordinary people focus on the fact that
when times are tough, people can’t afford college. Economists, on the other hand, see that there is an
opposing effect: When times are tough, the price (or opportunity cost) of attending college is low.
There’s some truth to both viewpoints. It’s tough for you or your parents to pay for tuition when jobs
are hard to come by and income is low, but as you learned, in the real world, it’s actually quite common
for students to flood colleges during recessions. That means that the price effect usually dominates.
2. When bad weather in India destroys the crop, does this sound like a fall in the total “supply” of
crops or a fall in people’s “demand” for crops? Keep your answer in mind as you learn about
economic booms and busts later on.
Solution
2. It sounds like a fall in supply.
3. How much did national output fall during the Great Depression? According to the chapter, which
government agency might have helped to avoid much of the Great Depression had it acted more
quickly and appropriately?
Solution
3. Output fell by about 30%, and much of the blame belongs to the Federal Reserve for failing to act.
,4. The chapter lists four things that entrepreneurs save and invest in. Which of the four are actual
objects, and which are more intangible, like concepts or ideas or plans? Feel free to use Wikipedia or
some other reference source to get definitions of unfamiliar terms.
Solution
4. Physical capital is the object, while human capital (education), innovation, and efficient organization
are more like concepts, ideas, or plans.
5. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a
scientist who earns a percentage of the profits from any new medicine they might invent, or a
scientist who will get a handshake and a thank-you note from their boss if they invent a new
medicine?
Solution
5. The scientist who gets a share of the profits will have a stronger incentive to invent more new drugs.
6. In the discussion of Big Idea Five, the chapter says that “self-sufficiency is death” because most of us
would not be able to produce for ourselves the food and shelter that we need to survive. In addition
to death, however, one could also say that self-sufficiency is boredom or ignorance. How does
specialization and trade help you to avoid boredom and ignorance?
Solution
6. Just as each of us could not produce enough food and shelter to survive, we also could not produce
enough entertainment or educational/informational services to keep us from boredom or ignorance.
Under total self-sufficiency, one would have to produce any TV show one watched and gather any news
one is interested in and so on. Clearly, this is not possible, especially because everyone would be too
busy just trying to survive.
7. Aniyah is visiting her family over winter break. Her mom asks if she needs any household products
before heading back to school. She tells her that she needs paper towels and suggests they go to the
supermarket to get some. Aniyah’s mom says that they should go to Costco instead. Her rationale is
that while the total cost of the bulk package from Costco may be more expensive than a smaller
package from the supermarket, the per unit price of each additional unit in the bulk package will be
cheaper than at the supermarket. Which big idea of economics does this scenario illustrate? Briefly
explain why.
Solution
,7. Thinking at the margin; Aniyah’s mom is thinking at the margin by considering the unit cost of each
additional paper towel roll bought in the bulk package. This big idea is the best fit, though there are
other possibilities.
8. Over the past six months, Ajay has become an avid disc golfer. Ajay’s roommate, Thiago, initially
introduced him to the sport, and he has loved it ever since. Knowing how excited Ajay is for his
newfound hobby, Ajay’s girlfriend and another of his friends decide to buy him the same disc-golfing
bag for Christmas. Ajay does not need two of the same bag, so he decides to sell one of the bags to
Thiago for lower than the market price—which both Ajay and Thiago think is a great deal. Which big
idea of economics does this scenario illustrate? Briefly explain why.
Solution
8. The power of trade; in this scenario, Ajay and Thiago are able to engage in mutually beneficial trade,
all by acting in their own self-interests. This big idea is the best fit, though there are other possibilities.
THINKING AND PROBLEM SOLVING
9. In recent years, Venezuela has had hyperinflation, with the price of a cup of coffee increasing from
0.2 old bolivars in January 2018 to 8.7 million old bolivars in January 2022. (As a result, Venezuela
was forced to devalue their currency in October 2021, removing six zeros. So the price of a cup of
coffee was 8.7 new bolivars in January 2022. A previous devaluation in August 2018 had removed an
additional five zeros from the currency, meaning the price of a cup of coffee in January 2022 in old,
old bolivars would have been be 0.87 trillion!) According to what you learned in this chapter, what
do you think the government can do to end this hyperinflation?
Solution
9. It can stop printing so much money. In fact, the government has started to implement this policy, and
Venezuela has recently officially exited hyperinflation, although their inflation rate was still over 100%
annually as of June 2022.
10. Some people worry that machines will take jobs away from people, making people permanently
unemployed. Only 150 years ago in the United States, most people were farmers. Now, machines do
almost all of the farmwork, and fewer than 1.3% of Americans are farmers, yet that 1.3% produces
enough food to feed the entire country while still exporting food overseas.
, a. What happened to all of those people who used to work on farms? Do you think most adult
males in the United States are unemployed nowadays, now that the farmwork is gone?
b. Some people say that it’s okay for machines to take jobs because we’ll get jobs fixing the
machines. Just from looking around, do you think that most working Americans are earning a
living by fixing farm equipment? If not, what do you think most working people are doing
instead? (We’ll give a full answer later in this book.)
Solution
10. a. They are mostly employed in other industries. Farm states don’t have tens of millions of people
searching for jobs.
b. Very few people fix farm equipment for a living. Instead, they work in offices, warehouses, and
factories. The demand for more goods and services is almost limitless, so when innovations make it
possible to produce a good with fewer resources, other resources (including labor) are freed up to
produce other goods and services.
11. Let’s connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because
they don’t have enough money? In other words, could a country get richer by printing more pieces
of paper called “money” and handing those out to its citizens?
Solution
11. No. If a country printed more money, prices would rise, but the country would not get richer.
12. Nobel Prize winner Milton Friedman said that a bad central banker is like a “fool in the shower.” In a
shower, of course, when you turn the faucet right now, it won’t show up in the showerhead for a
few seconds. So if a “fool in the shower” is always making big changes in the temperature based on
how the water feels right now, the water is likely to swing back and forth between too hot and too
cold. How does this apply to central banking?
Solution
12. It takes a few months for the central banker’s actions to affect the economy. So if they are always
making today’s decisions based on how the economy looks right now, they might make the economy
swing back and forth between too “hot” and too “cold.”
MODERN PRINCIPLES OF ECONOMICS
6TH EDITION
CHAPTER NO. 01: THE BIG IDEAS
FACTS AND TOOLS
1. A headline in the New York Times read, “Study Finds Enrollment Is Up at Colleges Despite
Recession.” How would you rewrite this headline now that you understand the idea of opportunity
cost?
Solution
1. The easiest change is to switch “despite” to “because of.” Ordinary people focus on the fact that
when times are tough, people can’t afford college. Economists, on the other hand, see that there is an
opposing effect: When times are tough, the price (or opportunity cost) of attending college is low.
There’s some truth to both viewpoints. It’s tough for you or your parents to pay for tuition when jobs
are hard to come by and income is low, but as you learned, in the real world, it’s actually quite common
for students to flood colleges during recessions. That means that the price effect usually dominates.
2. When bad weather in India destroys the crop, does this sound like a fall in the total “supply” of
crops or a fall in people’s “demand” for crops? Keep your answer in mind as you learn about
economic booms and busts later on.
Solution
2. It sounds like a fall in supply.
3. How much did national output fall during the Great Depression? According to the chapter, which
government agency might have helped to avoid much of the Great Depression had it acted more
quickly and appropriately?
Solution
3. Output fell by about 30%, and much of the blame belongs to the Federal Reserve for failing to act.
,4. The chapter lists four things that entrepreneurs save and invest in. Which of the four are actual
objects, and which are more intangible, like concepts or ideas or plans? Feel free to use Wikipedia or
some other reference source to get definitions of unfamiliar terms.
Solution
4. Physical capital is the object, while human capital (education), innovation, and efficient organization
are more like concepts, ideas, or plans.
5. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a
scientist who earns a percentage of the profits from any new medicine they might invent, or a
scientist who will get a handshake and a thank-you note from their boss if they invent a new
medicine?
Solution
5. The scientist who gets a share of the profits will have a stronger incentive to invent more new drugs.
6. In the discussion of Big Idea Five, the chapter says that “self-sufficiency is death” because most of us
would not be able to produce for ourselves the food and shelter that we need to survive. In addition
to death, however, one could also say that self-sufficiency is boredom or ignorance. How does
specialization and trade help you to avoid boredom and ignorance?
Solution
6. Just as each of us could not produce enough food and shelter to survive, we also could not produce
enough entertainment or educational/informational services to keep us from boredom or ignorance.
Under total self-sufficiency, one would have to produce any TV show one watched and gather any news
one is interested in and so on. Clearly, this is not possible, especially because everyone would be too
busy just trying to survive.
7. Aniyah is visiting her family over winter break. Her mom asks if she needs any household products
before heading back to school. She tells her that she needs paper towels and suggests they go to the
supermarket to get some. Aniyah’s mom says that they should go to Costco instead. Her rationale is
that while the total cost of the bulk package from Costco may be more expensive than a smaller
package from the supermarket, the per unit price of each additional unit in the bulk package will be
cheaper than at the supermarket. Which big idea of economics does this scenario illustrate? Briefly
explain why.
Solution
,7. Thinking at the margin; Aniyah’s mom is thinking at the margin by considering the unit cost of each
additional paper towel roll bought in the bulk package. This big idea is the best fit, though there are
other possibilities.
8. Over the past six months, Ajay has become an avid disc golfer. Ajay’s roommate, Thiago, initially
introduced him to the sport, and he has loved it ever since. Knowing how excited Ajay is for his
newfound hobby, Ajay’s girlfriend and another of his friends decide to buy him the same disc-golfing
bag for Christmas. Ajay does not need two of the same bag, so he decides to sell one of the bags to
Thiago for lower than the market price—which both Ajay and Thiago think is a great deal. Which big
idea of economics does this scenario illustrate? Briefly explain why.
Solution
8. The power of trade; in this scenario, Ajay and Thiago are able to engage in mutually beneficial trade,
all by acting in their own self-interests. This big idea is the best fit, though there are other possibilities.
THINKING AND PROBLEM SOLVING
9. In recent years, Venezuela has had hyperinflation, with the price of a cup of coffee increasing from
0.2 old bolivars in January 2018 to 8.7 million old bolivars in January 2022. (As a result, Venezuela
was forced to devalue their currency in October 2021, removing six zeros. So the price of a cup of
coffee was 8.7 new bolivars in January 2022. A previous devaluation in August 2018 had removed an
additional five zeros from the currency, meaning the price of a cup of coffee in January 2022 in old,
old bolivars would have been be 0.87 trillion!) According to what you learned in this chapter, what
do you think the government can do to end this hyperinflation?
Solution
9. It can stop printing so much money. In fact, the government has started to implement this policy, and
Venezuela has recently officially exited hyperinflation, although their inflation rate was still over 100%
annually as of June 2022.
10. Some people worry that machines will take jobs away from people, making people permanently
unemployed. Only 150 years ago in the United States, most people were farmers. Now, machines do
almost all of the farmwork, and fewer than 1.3% of Americans are farmers, yet that 1.3% produces
enough food to feed the entire country while still exporting food overseas.
, a. What happened to all of those people who used to work on farms? Do you think most adult
males in the United States are unemployed nowadays, now that the farmwork is gone?
b. Some people say that it’s okay for machines to take jobs because we’ll get jobs fixing the
machines. Just from looking around, do you think that most working Americans are earning a
living by fixing farm equipment? If not, what do you think most working people are doing
instead? (We’ll give a full answer later in this book.)
Solution
10. a. They are mostly employed in other industries. Farm states don’t have tens of millions of people
searching for jobs.
b. Very few people fix farm equipment for a living. Instead, they work in offices, warehouses, and
factories. The demand for more goods and services is almost limitless, so when innovations make it
possible to produce a good with fewer resources, other resources (including labor) are freed up to
produce other goods and services.
11. Let’s connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because
they don’t have enough money? In other words, could a country get richer by printing more pieces
of paper called “money” and handing those out to its citizens?
Solution
11. No. If a country printed more money, prices would rise, but the country would not get richer.
12. Nobel Prize winner Milton Friedman said that a bad central banker is like a “fool in the shower.” In a
shower, of course, when you turn the faucet right now, it won’t show up in the showerhead for a
few seconds. So if a “fool in the shower” is always making big changes in the temperature based on
how the water feels right now, the water is likely to swing back and forth between too hot and too
cold. How does this apply to central banking?
Solution
12. It takes a few months for the central banker’s actions to affect the economy. So if they are always
making today’s decisions based on how the economy looks right now, they might make the economy
swing back and forth between too “hot” and too “cold.”
