Solution Manual For
Macroeconomics 17CE Canadian By Campbell R. McConnell, Sean Masaki Flynn, Stanley L.
Brue, Tom Barbiero, Keyvan Eslami
Chapter 1-19
Chapter 1 - Limits, Alternatives, and Choices
DISCUSSION QUESTIONS
1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of
the following decisions would entail the greater opportunity cost: Allocating a square block in the
heart of Toronto for a surface parking lot or allocating a square block at the edge of a typical
suburb for such a lot? Explain. LO1.2
Answer: An opportunity cost is what was sacrificed to do or acquire something else. The
condition of scarcity creates opportunity cost. If there was no scarcity, there would be no need to
sacrifice one thing to acquire another.
The opportunity cost would be much higher in Toronto as the alternative uses for that square
block are much more valuable than for a typical suburban city block.
2. Cite three examples of recent decisions that you made in which you, (at least implicitly), weighed
marginal cost and marginal benefit. LO1.2
Answer: Student answers will vary, but may include the decision to come to class, to skip
breakfast to get a few extra minutes of sleep, to attend college, or to make a purchase. Marginal
benefits of attending class may include the acquisition of knowledge, participation in discussion,
and better preparation for an upcoming examination. Marginal costs may include lost
opportunities for sleep, meals, or studying for other classes. In evaluating the discussion of
marginal benefits and marginal costs, be careful to watch for sunk costs offered as a rationale for
marginal decisions.
3. What is ―utility‖ and how does the idea relate to purposeful behaviour? LO1.2
Answer: ―Utility‖ refers to the pleasure, happiness, or satisfaction gained from engaging in an
activity (eating a meal, attending a ball game, etc.). It is an important component of purposeful
behaviour because people will allocate their scarce time, energy, and money in an attempt to gain
the most utility possible.
4. What are the key elements of the scientific method and how does this method relate to economic
principles and laws? LO1.3
Answer: The key elements include the gathering of data (observation), the formulation of
possible explanations (hypothesis), testing the hypothesis, determining the validity of the
hypothesis, and repeated testing of hypotheses that have appeared to be valid in prior tests.
The scientific method is the technique used by economists to determine economic laws or
principles. These laws or principles are formulated to explain and/or predict behavior of
individuals or institutions.
5. Make (a) a positive economic statement of your choice, and then (b) a normative economic
statement relating to your first statement. LO1.4
Answer: Student answers will vary. Example: (a) The unemployment rate is 6.8 percent; (b) the
unemployment rate is too high. In general, we treat ―what is‖ statements as positive, ―what
should be‖ as normative, but keep an eye out for statements like ―at full employment an increase
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, in the production of pizzas should come at the cost of less robots.‖ Some students may incorrectly
identify the statement as normative because of the term ―should.‖
6. How does the slope of a budget line illustrate opportunity cost and trade-offs? How does a
budget line illustrate scarcity and the effect of limited incomes? LO1.5
Answer: Budget lines are always sloped downward. This downward slope shows an inverse
relationship between the two goods, meaning that as you increase one, the other must
decrease. This decrease is what you are giving up, or opportunity cost, of the good you are
getting more of.
Budget lines illustrate scarcity in that they show you are limited by your income. Since they slope
downward, they show you cannot keep getting more and more of both goods. There is always a
trade-off. The area beyond the budget line represents combinations of the goods that are beyond
your income.
7. What are economic resources? What categories do economists use to classify them? Why are
resources also called factors of production? Why are they called inputs? LO1.6
Answer: Economic resources are the natural, human, and manufactured inputs used to produce
goods and services. Economic resources fall into four main categories: labour, land (natural
resources), real capital (machines, factories, buildings, etc.,) and entrepreneurs. Economic
resources are also called factors of production because they are used to produce goods and
services. They are called inputs because they go in to a production process (like ingredients go
into a bowl to make a cake), with the resulting goods and services also being referred to as output.
8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial
ability considered a category of economic resource, distinct from labour? What are the major
functions of the entrepreneur? LO1.6
Answer: Money is not considered a capital resource because money is not productive – it
provides access to resources but itself does not directly contribute to the production of goods and
services. Additionally, the quantity of money in circulation does not determine an economy‘s
productive capacity, while the amount of capital and other resources do. Doubling the amount of
money in circulation does not change the economy‘s physical capacity to produce goods and
services. Money is, however, referred as a financial resource and financial capital, reflecting its
ability to acquire real economic resources.
Entrepreneurial ability and labour are both human resources, but they perform different functions
in the productive process. Entrepreneurial ability does not directly produce goods and services; it
organizes the resources that do. Labour refers to the human inputs that directly engage in
production.
Entrepreneurs are risk-takers: They coordinate the activities of the other three inputs for profit—
or loss, which is why they are called risk-takers. Entrepreneurs sometimes manage companies
that they own, but a manager who is not an owner is not necessarily an entrepreneur but may be
performing some of the entrepreneurial functions for the company. Entrepreneurs are also
innovators, or perhaps inventors, and profits help to motivate such activities.
9. Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are
these curves used to determine the optimal allocation of resources to a particular product? If
current output is such that marginal cost exceeds marginal benefit, should more or fewer
resources be allocated to this product? Explain. LO1.7
Answer: The marginal benefit curve is downward sloping; MB falls as more of a product is
consumed because additional units of a good yield less satisfaction than previous units. The
marginal cost curve is upward sloping, MC increases as more of a product is produced since
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, additional units require the use of increasingly unsuitable resource. The optimal amount of a
particular product occurs where MB equals MC. If MC exceeds MB, fewer resources should be
allocated to this use, as the additional cost is more than the additional benefit.
10. Suppose that, on the basis of a nation‘s production possibilities curve, an economy must sacrifice
10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the
robot from another country in exchange for 9,000 pizzas. Relate this information to the following
statement:
―Through international specialization and trade, a nation can reduce its opportunity cost of
obtaining goods and thus ‗move outside its production possibilities curve.‘‖ LO1.8
Answer: The message of the production possibilities curve is that an individual nation is limited
to the combinations of output indicated by its production possibilities curve. International
specialization means directing domestic resources to output which a nation is highly efficient at
producing. International trade involves the exchange of these goods for goods produced abroad.
Specialization and trade have the same effect as having more and better resources or discovering
improved production techniques. The output gains from greater international specialization and
trade are the equivalent of economic growth.
LAST WORD
Studies indicate that married men on average earn more income than unmarried men of the same
age and education level. Why must we be cautious in concluding that marriage is the cause and
higher income is the effect?
Answer: Cause and effect are difficult to determine in many instances. Here, it may be
possible that the same underlying personality characteristics—such as the ability to get
along with people and a commitment to hard work— that lead people to on average earn
higher incomes also on average lead them to be more successful in finding mates. Thus, it
may not be the case at all that marriage causes higher incomes. Rather, underlying
personality characteristics may drive both higher earnings and a greater likelihood of
getting married.
REVIEW QUESTIONS
1. Match each term with the correct definition. LO1.2
economics, opportunity cost, marginal analysis, utility
b. The next-best thing that must be foregone in order to produce more unit of a given product.
d. The pleasure, happiness, or satisfaction obtained from consuming a good or service.
a. The social science concerned with how individuals, institutions, and society make optimal
(best) choices under conditions of scarcity.
c. Making choices based on comparing marginal benefits with marginal costs.
Answer: a. opportunity cost; b. utility; c. economics; d. marginal analysis
2. Indicate whether each of the following statements applies to microeconomics or
macroeconomics: LO1.4
a) The unemployment rate in Canada was 5.2 percent in January 2018.
b) A software firm discharged 15 workers last month and transferred the work to India.
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McGraw Hill LLC..© 2025
, c) An unexpected freeze in central Florida reduced the citrus crop and caused the price
of oranges to rise.
d) Canadian output, adjusted for inflation, increased by 3.6 percent in 2022.
e) Last week ScotiaBank lowered its interest rate on business loans by one-half of 1
percentage point.
f) The consumer price index rose by 2.8 percent from May 2023 to June 2023.
Answer: a. macro; b. micro; c. micro; d. macro; e. micro; f. micro
3. Suppose that you initially have $100 to spend on books or movie tickets. The books start off
costing $25 each and the movie tickets start off costing $10 each. For each of the following
situations, would the attainable set of combinations that you can afford increase or decrease?
LO1.5
a) Your budget increases from $100 to $150 while the prices stay the same.
b) Your budget remains $100, the price of books remains $25, but the price of movie
tickets rises to $20.
c) Your budget remains $100, the price of movie tickets remains $10, but the price of a
book falls to $15.
Answer:
a. increase because a larger budget allows you to purchase not only the combinations that you
could afford before but also new combinations that you could not afford before (for example, you
can now afford to purchase 4 books and 5 movie tickets);
b. decrease because certain combinations are no longer affordable (for example, you can no
longer purchase 10 movie tickets with your $100 budget);
c. increase because the lower price allows you to purchase combinations that you could not
afford before (for example, you can now purchase 6 books and 1 movie ticket)].
4. Suppose that you are given a $100 budget at work that can be spent only on two items:
staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity
cost of purchasing one stapler is: LO1.5
a) 10 pens.
b) 5 pens.
c) zero pens.
d) 4 pens.
Answer: 4 pens. You must forego purchasing 4 pens if you are to free up enough money
(4 x $2.50 = $10) to purchase a stapler.
5. As economists use the terms, investment is related to capital in the same way that:
[LO1.6]
a) MB is to MC.
b) practice is to acquiring skill.
c) colour is to sound.
d) positive economics is to normative economics.
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McGraw Hill LLC..© 2025
Macroeconomics 17CE Canadian By Campbell R. McConnell, Sean Masaki Flynn, Stanley L.
Brue, Tom Barbiero, Keyvan Eslami
Chapter 1-19
Chapter 1 - Limits, Alternatives, and Choices
DISCUSSION QUESTIONS
1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of
the following decisions would entail the greater opportunity cost: Allocating a square block in the
heart of Toronto for a surface parking lot or allocating a square block at the edge of a typical
suburb for such a lot? Explain. LO1.2
Answer: An opportunity cost is what was sacrificed to do or acquire something else. The
condition of scarcity creates opportunity cost. If there was no scarcity, there would be no need to
sacrifice one thing to acquire another.
The opportunity cost would be much higher in Toronto as the alternative uses for that square
block are much more valuable than for a typical suburban city block.
2. Cite three examples of recent decisions that you made in which you, (at least implicitly), weighed
marginal cost and marginal benefit. LO1.2
Answer: Student answers will vary, but may include the decision to come to class, to skip
breakfast to get a few extra minutes of sleep, to attend college, or to make a purchase. Marginal
benefits of attending class may include the acquisition of knowledge, participation in discussion,
and better preparation for an upcoming examination. Marginal costs may include lost
opportunities for sleep, meals, or studying for other classes. In evaluating the discussion of
marginal benefits and marginal costs, be careful to watch for sunk costs offered as a rationale for
marginal decisions.
3. What is ―utility‖ and how does the idea relate to purposeful behaviour? LO1.2
Answer: ―Utility‖ refers to the pleasure, happiness, or satisfaction gained from engaging in an
activity (eating a meal, attending a ball game, etc.). It is an important component of purposeful
behaviour because people will allocate their scarce time, energy, and money in an attempt to gain
the most utility possible.
4. What are the key elements of the scientific method and how does this method relate to economic
principles and laws? LO1.3
Answer: The key elements include the gathering of data (observation), the formulation of
possible explanations (hypothesis), testing the hypothesis, determining the validity of the
hypothesis, and repeated testing of hypotheses that have appeared to be valid in prior tests.
The scientific method is the technique used by economists to determine economic laws or
principles. These laws or principles are formulated to explain and/or predict behavior of
individuals or institutions.
5. Make (a) a positive economic statement of your choice, and then (b) a normative economic
statement relating to your first statement. LO1.4
Answer: Student answers will vary. Example: (a) The unemployment rate is 6.8 percent; (b) the
unemployment rate is too high. In general, we treat ―what is‖ statements as positive, ―what
should be‖ as normative, but keep an eye out for statements like ―at full employment an increase
1-1
McGraw Hill LLC..© 2025
, in the production of pizzas should come at the cost of less robots.‖ Some students may incorrectly
identify the statement as normative because of the term ―should.‖
6. How does the slope of a budget line illustrate opportunity cost and trade-offs? How does a
budget line illustrate scarcity and the effect of limited incomes? LO1.5
Answer: Budget lines are always sloped downward. This downward slope shows an inverse
relationship between the two goods, meaning that as you increase one, the other must
decrease. This decrease is what you are giving up, or opportunity cost, of the good you are
getting more of.
Budget lines illustrate scarcity in that they show you are limited by your income. Since they slope
downward, they show you cannot keep getting more and more of both goods. There is always a
trade-off. The area beyond the budget line represents combinations of the goods that are beyond
your income.
7. What are economic resources? What categories do economists use to classify them? Why are
resources also called factors of production? Why are they called inputs? LO1.6
Answer: Economic resources are the natural, human, and manufactured inputs used to produce
goods and services. Economic resources fall into four main categories: labour, land (natural
resources), real capital (machines, factories, buildings, etc.,) and entrepreneurs. Economic
resources are also called factors of production because they are used to produce goods and
services. They are called inputs because they go in to a production process (like ingredients go
into a bowl to make a cake), with the resulting goods and services also being referred to as output.
8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial
ability considered a category of economic resource, distinct from labour? What are the major
functions of the entrepreneur? LO1.6
Answer: Money is not considered a capital resource because money is not productive – it
provides access to resources but itself does not directly contribute to the production of goods and
services. Additionally, the quantity of money in circulation does not determine an economy‘s
productive capacity, while the amount of capital and other resources do. Doubling the amount of
money in circulation does not change the economy‘s physical capacity to produce goods and
services. Money is, however, referred as a financial resource and financial capital, reflecting its
ability to acquire real economic resources.
Entrepreneurial ability and labour are both human resources, but they perform different functions
in the productive process. Entrepreneurial ability does not directly produce goods and services; it
organizes the resources that do. Labour refers to the human inputs that directly engage in
production.
Entrepreneurs are risk-takers: They coordinate the activities of the other three inputs for profit—
or loss, which is why they are called risk-takers. Entrepreneurs sometimes manage companies
that they own, but a manager who is not an owner is not necessarily an entrepreneur but may be
performing some of the entrepreneurial functions for the company. Entrepreneurs are also
innovators, or perhaps inventors, and profits help to motivate such activities.
9. Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are
these curves used to determine the optimal allocation of resources to a particular product? If
current output is such that marginal cost exceeds marginal benefit, should more or fewer
resources be allocated to this product? Explain. LO1.7
Answer: The marginal benefit curve is downward sloping; MB falls as more of a product is
consumed because additional units of a good yield less satisfaction than previous units. The
marginal cost curve is upward sloping, MC increases as more of a product is produced since
1-2
McGraw Hill LLC..© 2025
, additional units require the use of increasingly unsuitable resource. The optimal amount of a
particular product occurs where MB equals MC. If MC exceeds MB, fewer resources should be
allocated to this use, as the additional cost is more than the additional benefit.
10. Suppose that, on the basis of a nation‘s production possibilities curve, an economy must sacrifice
10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the
robot from another country in exchange for 9,000 pizzas. Relate this information to the following
statement:
―Through international specialization and trade, a nation can reduce its opportunity cost of
obtaining goods and thus ‗move outside its production possibilities curve.‘‖ LO1.8
Answer: The message of the production possibilities curve is that an individual nation is limited
to the combinations of output indicated by its production possibilities curve. International
specialization means directing domestic resources to output which a nation is highly efficient at
producing. International trade involves the exchange of these goods for goods produced abroad.
Specialization and trade have the same effect as having more and better resources or discovering
improved production techniques. The output gains from greater international specialization and
trade are the equivalent of economic growth.
LAST WORD
Studies indicate that married men on average earn more income than unmarried men of the same
age and education level. Why must we be cautious in concluding that marriage is the cause and
higher income is the effect?
Answer: Cause and effect are difficult to determine in many instances. Here, it may be
possible that the same underlying personality characteristics—such as the ability to get
along with people and a commitment to hard work— that lead people to on average earn
higher incomes also on average lead them to be more successful in finding mates. Thus, it
may not be the case at all that marriage causes higher incomes. Rather, underlying
personality characteristics may drive both higher earnings and a greater likelihood of
getting married.
REVIEW QUESTIONS
1. Match each term with the correct definition. LO1.2
economics, opportunity cost, marginal analysis, utility
b. The next-best thing that must be foregone in order to produce more unit of a given product.
d. The pleasure, happiness, or satisfaction obtained from consuming a good or service.
a. The social science concerned with how individuals, institutions, and society make optimal
(best) choices under conditions of scarcity.
c. Making choices based on comparing marginal benefits with marginal costs.
Answer: a. opportunity cost; b. utility; c. economics; d. marginal analysis
2. Indicate whether each of the following statements applies to microeconomics or
macroeconomics: LO1.4
a) The unemployment rate in Canada was 5.2 percent in January 2018.
b) A software firm discharged 15 workers last month and transferred the work to India.
1-3
McGraw Hill LLC..© 2025
, c) An unexpected freeze in central Florida reduced the citrus crop and caused the price
of oranges to rise.
d) Canadian output, adjusted for inflation, increased by 3.6 percent in 2022.
e) Last week ScotiaBank lowered its interest rate on business loans by one-half of 1
percentage point.
f) The consumer price index rose by 2.8 percent from May 2023 to June 2023.
Answer: a. macro; b. micro; c. micro; d. macro; e. micro; f. micro
3. Suppose that you initially have $100 to spend on books or movie tickets. The books start off
costing $25 each and the movie tickets start off costing $10 each. For each of the following
situations, would the attainable set of combinations that you can afford increase or decrease?
LO1.5
a) Your budget increases from $100 to $150 while the prices stay the same.
b) Your budget remains $100, the price of books remains $25, but the price of movie
tickets rises to $20.
c) Your budget remains $100, the price of movie tickets remains $10, but the price of a
book falls to $15.
Answer:
a. increase because a larger budget allows you to purchase not only the combinations that you
could afford before but also new combinations that you could not afford before (for example, you
can now afford to purchase 4 books and 5 movie tickets);
b. decrease because certain combinations are no longer affordable (for example, you can no
longer purchase 10 movie tickets with your $100 budget);
c. increase because the lower price allows you to purchase combinations that you could not
afford before (for example, you can now purchase 6 books and 1 movie ticket)].
4. Suppose that you are given a $100 budget at work that can be spent only on two items:
staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity
cost of purchasing one stapler is: LO1.5
a) 10 pens.
b) 5 pens.
c) zero pens.
d) 4 pens.
Answer: 4 pens. You must forego purchasing 4 pens if you are to free up enough money
(4 x $2.50 = $10) to purchase a stapler.
5. As economists use the terms, investment is related to capital in the same way that:
[LO1.6]
a) MB is to MC.
b) practice is to acquiring skill.
c) colour is to sound.
d) positive economics is to normative economics.
1-4
McGraw Hill LLC..© 2025
