INSTRUCTOR'S SOLUTIONS MANUAL
MICROECONOMICS
3RD GLOBAL EDITION
CHAPTER 1: THE PRINCIPLES AND PRACTICE OF ECONOMICS
QUESTIONS
1. Give examples to explain how economic analysis can be positive and normative.
Answer: Positive economics is objective and based on facts. However, normative economics is
subjective and opinion-based. For example,
Positive economics: The mismatch between students’ knowledge and market requirements is a factor
that underlies low employability.
Normative economics: The government should increase the minimum wage earned by each
employee.
2. Economists think of almost all human behavior as the outcome of choices. Do you agree with
this statement? Based on your reading of the chapter, how would you define economics?
Answer: Scarcity of resources for individuals, firms, and nations in the situation of having unlimited
wants pushes them to make choices by allocating scarce resources to their wants. Individuals have
limited budgets (scarce resources) compared to the unlimited wants that they wish to satisfy. Firms
have unlimited investment projects as compared to their limited budgets. Nations may have many
areas—growth, human development, healthcare, legislature, and education—that require
expenditure, but due to limited budgets, governments need to prioritize areas for spending.
Economics is a science that helps in performing this allocation.
3. Examine the following statements and determine if they are examples of normative economics
or positive economics. Explain your answer.
a. According to the World Economic Outlook Update released by the International Monetary
Fund in January 2021, the global economy is projected to grow 5.5 percent in 2021 and 4.2
percent in 2022.
b. According to an article published in the European Central Bank (ECB) Economic Bulletin in
January 2021, government spending on investment should be a priority during the interim
phase in the run-up to the economic recovery in the euro area.
Answer:
a. This is an objective prediction released by the IMF about growth in the global economy.
Positive economics is analysis that generates objective descriptions or predictions about the
world, which can be substantiated with data. Since data can be used to underline why the
IMF believes that growth will be 5.5 percent in 2021 and 4.2 percent in 2022, this is an
example of positive economic analysis. However, students should note that different
organizations may have different growth predictions about the global economy and that the
IMF itself will revise these calculations every quarter.
b. The statement that government spending on investment should be a priority is normative
since it states what governments ought to do. Normative economics prescribes what an
individual or society should do. Source: Stephan Haroutunian, Steffen Osterloh, and Kamila
, Sławińska,“The Initial Fiscal Policy Responses of Euro Area Countries to the Covid-19
Crisis,” ECB Economic Bulletin, January 2021,
https://www.ecb.europa.eu/pub/economicbulletin/articles/2021/html/ecb.ebart202101_03~c
5595cd291.en.html.
4. How does microeconomics differ from macroeconomics? Would the supply of iPhones in the
United States be studied under microeconomics or macroeconomics? What about the growth
rate of total economic output in the national economy?
Answer: Microeconomics is the study of how individuals, households, firms, and governments make
choices, and how those choices affect prices, the allocation of resources, and the well-being of other
agents. Macroeconomics is the study of the economy as a whole. Macroeconomists study factors that
affect overall – in other words, aggregate – economic performance.
The supply of iPhones refers to the supply of a good by an individual firm, Apple. The iPhone
market will be studied under microeconomics. Microeconomics studies how individuals, households,
firms and governments make choices, and how those choices affect prices and the allocation of
resources. The growth rate of total economic output, on the other hand, refers to the aggregate
American economy, and is therefore studied under macroeconomics.
5. Why do economic agents have to make trade-offs on any given day of their lives? What kind of
non-monetary budget constraints do agents face?
Answer: An economic agent faces the prospect of a trade-off when the agent needs to give up one
thing to get something else. For instance, an agent faces a trade-off when organizing their daily
schedule. Should they go to work, or stay at home and watch a TV series? Should they spend an
extra hour at work or hang out with friends? Should they spend their free time focusing on getting an
extra degree in legal studies or be happy with the current work position they are in?
An example of a non-monetary budget constraint is that of time. All economic agents have 24 hours
in their day. Therefore, based on their utilities, agents optimize by making trade-offs on the type of
activity that they take part in.
6. This chapter introduces the idea of opportunity cost.
a. What is meant by opportunity cost?
b. What is the opportunity cost of taking a year after graduating from high school and
backpacking across Europe? Are people who do so being irrational?
Answer:
a. Opportunity cost is the best alternative use of a resource. The opportunity cost of a
particular choice is measured in terms of the benefit foregone from the next best alternative.
To facilitate comparison, the benefits and costs of various choices are translated into
monetary units like dollars.
b. The opportunity cost of backpacking across Europe, for a particular person, is the cost of
anything else that could have been done in that year. The backpacker could have attended
college or started working. These costs are the opportunity costs of the gap year. This,
however, does not mean that backpackers are irrational, because the benefits may exceed
the cost. Every action has an opportunity cost. The choices that people make are optimal
based on their perceived costs and benefits.
7. Suppose you wish to take out a mortgage to buy a new house for your family. However, the
houses you like exceed your budget. You are considering three options: choose a neighborhood
that is less fashionable and, therefore, the prices are lower; take out a mortgage with a longer
maturity period; or instead of buying a house, buy a larger apartment in your current
neighborhood. How would you evaluate these options and choose the optimal one?
,Answer: You can use cost-benefit analysis to compare the various feasible alternatives and pick the
best one. Cost-benefit analysis is a calculation that adds up costs and benefits using a common unit
of measurement, such as euros. Buying a house in a less fashionable neighborhood would give you a
larger space and your family a garden to enjoy; however, it might take longer to commute to work,
or the schools in the locality might be of a lower quality. The mortgage with a longer maturity period
allows you to buy your dream house, but you will be opening yourself up to a greater risk of default
should you, or your partner, face job loss. Buying a larger apartment instead of a house gives you
enough room for an expanding family, but not a garden. All these options need to be converted into
values in euros. This will include monetary as well as opportunity costs. You can then choose the
option that offers you the greatest net benefit.
8. Suppose the market price of the latest model of iPhone is €759 in Germany. What are the three
conditions that will need to be satisfied for the iPhone market to be in equilibrium at this price?
Answer: For the market to be in equilibrium, three conditions will need to be satisfied:
• At the price of €759 per unit, the number of iPhones supplied by Apple should be equal to
the number of iPhones purchased by buyers in the market.
• Apple has chosen the optimal quantity of iPhones to supply, given the price of €759 per
unit.
• Consumers have chosen the optimal quantity of iPhones to buy, given the price of €759 per
unit.
9. Suppose you are living in a housing project that has 100 apartments. The housing project has its
own garden, swimming pool, library, and community center. To be able to utilize the available
amenities, residents must contribute €50 a month towards the upkeep while also taking turns
keep it clean. In this context, answer the following questions.
a. What is meant by free riding?
b. How would you define a free-riding resident? Why would it be a problem for the housing
project?
Answer:
a. A free rider is a person who receives the benefit of a good but avoids paying for it. People
tend to pursue their own private interests and usually don’t contribute voluntarily to the
public interest. For example, watching a pirated copy of a movie is cheaper than buying
one. Those who watch the pirated version are free riders because there are others who buy
the movie or pay for movie tickets. If everyone watched pirated copies, making movies
would not be profitable and the industry would not function.
b. In the situation described in the question, a free-riding resident would be a person or family
that does not contribute in terms of money and commitment to maintain the housing project
and keep it clean. In a way, this person is using the services being offered by the housing
project for free and is taking advantage of the other contributing residents. This is a problem
for the housing project because it will compel the paying residents to either eventually pay
more money for the upkeep of the garden, swimming pool, and other amenities, or they will
have to work more in any given week to keep it clean.
10. “Scarcity exists because people have unlimited wants in a world of limited resources.” Explain
this statement using a real-life example.
Answer: Since the world has limited resources, no one can have everything they want. Scarce
resources are things that people want, where the quantity desired exceeds the quantity that is
available. For example, emerging viral pandemics, such as the COVID-19 pandemic, may place
unexpectedly high and sustained demands on public healthcare systems and on various essential
, services. However, certain regions with large outbreaks may have fewer hospital beds and
ventilators, or smaller hospitals in rural areas may have less space and supplies to offer. Thus, the
demand for such items in these regions, especially during a pandemic, may exceed the resources
available, causing scarcity. These situations will create the need to ration supplies and interventions.
11. Identify the cause and the effect in the following phenomena in a hypothetical country:
a. A surge in the price of goods and an increase in the workers’ income.
b. A rise in GDP and an increase in the number of university graduates.
Answer:
a. The increase in income is likely to induce people to spend more, thus leading to a surge in
prices.
b. The increase in the number of university graduates in the country is likely to lead to higher
productivity, resulting in a rise in GDP.
PROBLEMS
1. You have purchased a non-refundable ticket to the Maldives with an early morning departure
scheduled for Saturday. You receive a call notifying you about an interview for a job that may
be scheduled around the same time. While you really wanted this job, you think that going on
the trip is more important for your mental wellbeing as you have been planning this trip for a
year now.
a. The human resources department from the company you applied to informs you that there is
only one slot available for the interview, which clashes with your flight. Should this affect
your decision to go on the trip? Explain by using the term “opportunity cost.
b. Suppose instead that you realize that the non-refundable travel ticket, which you already
purchased, cost you €100; previously you had mistakenly believed the price was €250.
Should learning this information affect your decision to go to the Maldives trip?
Answer:
a. This should affect your decision, or at least make you reconsider. The explicit cost of the
trip has not changed, nor has the benefit of the trip itself. However, the opportunity cost of
not making it to the interview is now higher than you previously thought.
b. This should not affect your decision. Whether you paid €100 or €250 in the past is irrelevant
to the costs and benefits that you can affect by going (or not going) on the trip.
2. You are thinking about buying a house in London. You find one you like that costs £1,000,000.
You learn that, based on the value of the house and your wages, your bank will give you a
mortgage for 20 years in the region of £600,000. This means that you must make a down
payment of £400,000. What are some of the monetary and non-monetary opportunity costs of
this purchase?
Answer: By using your £400,000 to buy the house, you give up the opportunity to earn interest on
that money. If you could earn 4% interest, then the opportunity cost is 0.04 × £400,000 = £16,000
per year. Also, if the value of the house increases (real increase) by 2% per annum, then the value of
your property will have increased by £20,000 a year (£1,000,000 × 1.02 = £1,020,000). Subtracting
the opportunity cost of £16,000, this indicates a gain of £4,000. However, you will also have to pay
mortgage. At a 4% mortgage, you will be paying £24,000 per annum. Under these conditions, you
will have to decide whether it makes sense for you to buy the house. Some of the non-monetary
opportunity costs include the benefits associated with a better neighborhood, such as accessibility to
public transport, shops, and schools.
MICROECONOMICS
3RD GLOBAL EDITION
CHAPTER 1: THE PRINCIPLES AND PRACTICE OF ECONOMICS
QUESTIONS
1. Give examples to explain how economic analysis can be positive and normative.
Answer: Positive economics is objective and based on facts. However, normative economics is
subjective and opinion-based. For example,
Positive economics: The mismatch between students’ knowledge and market requirements is a factor
that underlies low employability.
Normative economics: The government should increase the minimum wage earned by each
employee.
2. Economists think of almost all human behavior as the outcome of choices. Do you agree with
this statement? Based on your reading of the chapter, how would you define economics?
Answer: Scarcity of resources for individuals, firms, and nations in the situation of having unlimited
wants pushes them to make choices by allocating scarce resources to their wants. Individuals have
limited budgets (scarce resources) compared to the unlimited wants that they wish to satisfy. Firms
have unlimited investment projects as compared to their limited budgets. Nations may have many
areas—growth, human development, healthcare, legislature, and education—that require
expenditure, but due to limited budgets, governments need to prioritize areas for spending.
Economics is a science that helps in performing this allocation.
3. Examine the following statements and determine if they are examples of normative economics
or positive economics. Explain your answer.
a. According to the World Economic Outlook Update released by the International Monetary
Fund in January 2021, the global economy is projected to grow 5.5 percent in 2021 and 4.2
percent in 2022.
b. According to an article published in the European Central Bank (ECB) Economic Bulletin in
January 2021, government spending on investment should be a priority during the interim
phase in the run-up to the economic recovery in the euro area.
Answer:
a. This is an objective prediction released by the IMF about growth in the global economy.
Positive economics is analysis that generates objective descriptions or predictions about the
world, which can be substantiated with data. Since data can be used to underline why the
IMF believes that growth will be 5.5 percent in 2021 and 4.2 percent in 2022, this is an
example of positive economic analysis. However, students should note that different
organizations may have different growth predictions about the global economy and that the
IMF itself will revise these calculations every quarter.
b. The statement that government spending on investment should be a priority is normative
since it states what governments ought to do. Normative economics prescribes what an
individual or society should do. Source: Stephan Haroutunian, Steffen Osterloh, and Kamila
, Sławińska,“The Initial Fiscal Policy Responses of Euro Area Countries to the Covid-19
Crisis,” ECB Economic Bulletin, January 2021,
https://www.ecb.europa.eu/pub/economicbulletin/articles/2021/html/ecb.ebart202101_03~c
5595cd291.en.html.
4. How does microeconomics differ from macroeconomics? Would the supply of iPhones in the
United States be studied under microeconomics or macroeconomics? What about the growth
rate of total economic output in the national economy?
Answer: Microeconomics is the study of how individuals, households, firms, and governments make
choices, and how those choices affect prices, the allocation of resources, and the well-being of other
agents. Macroeconomics is the study of the economy as a whole. Macroeconomists study factors that
affect overall – in other words, aggregate – economic performance.
The supply of iPhones refers to the supply of a good by an individual firm, Apple. The iPhone
market will be studied under microeconomics. Microeconomics studies how individuals, households,
firms and governments make choices, and how those choices affect prices and the allocation of
resources. The growth rate of total economic output, on the other hand, refers to the aggregate
American economy, and is therefore studied under macroeconomics.
5. Why do economic agents have to make trade-offs on any given day of their lives? What kind of
non-monetary budget constraints do agents face?
Answer: An economic agent faces the prospect of a trade-off when the agent needs to give up one
thing to get something else. For instance, an agent faces a trade-off when organizing their daily
schedule. Should they go to work, or stay at home and watch a TV series? Should they spend an
extra hour at work or hang out with friends? Should they spend their free time focusing on getting an
extra degree in legal studies or be happy with the current work position they are in?
An example of a non-monetary budget constraint is that of time. All economic agents have 24 hours
in their day. Therefore, based on their utilities, agents optimize by making trade-offs on the type of
activity that they take part in.
6. This chapter introduces the idea of opportunity cost.
a. What is meant by opportunity cost?
b. What is the opportunity cost of taking a year after graduating from high school and
backpacking across Europe? Are people who do so being irrational?
Answer:
a. Opportunity cost is the best alternative use of a resource. The opportunity cost of a
particular choice is measured in terms of the benefit foregone from the next best alternative.
To facilitate comparison, the benefits and costs of various choices are translated into
monetary units like dollars.
b. The opportunity cost of backpacking across Europe, for a particular person, is the cost of
anything else that could have been done in that year. The backpacker could have attended
college or started working. These costs are the opportunity costs of the gap year. This,
however, does not mean that backpackers are irrational, because the benefits may exceed
the cost. Every action has an opportunity cost. The choices that people make are optimal
based on their perceived costs and benefits.
7. Suppose you wish to take out a mortgage to buy a new house for your family. However, the
houses you like exceed your budget. You are considering three options: choose a neighborhood
that is less fashionable and, therefore, the prices are lower; take out a mortgage with a longer
maturity period; or instead of buying a house, buy a larger apartment in your current
neighborhood. How would you evaluate these options and choose the optimal one?
,Answer: You can use cost-benefit analysis to compare the various feasible alternatives and pick the
best one. Cost-benefit analysis is a calculation that adds up costs and benefits using a common unit
of measurement, such as euros. Buying a house in a less fashionable neighborhood would give you a
larger space and your family a garden to enjoy; however, it might take longer to commute to work,
or the schools in the locality might be of a lower quality. The mortgage with a longer maturity period
allows you to buy your dream house, but you will be opening yourself up to a greater risk of default
should you, or your partner, face job loss. Buying a larger apartment instead of a house gives you
enough room for an expanding family, but not a garden. All these options need to be converted into
values in euros. This will include monetary as well as opportunity costs. You can then choose the
option that offers you the greatest net benefit.
8. Suppose the market price of the latest model of iPhone is €759 in Germany. What are the three
conditions that will need to be satisfied for the iPhone market to be in equilibrium at this price?
Answer: For the market to be in equilibrium, three conditions will need to be satisfied:
• At the price of €759 per unit, the number of iPhones supplied by Apple should be equal to
the number of iPhones purchased by buyers in the market.
• Apple has chosen the optimal quantity of iPhones to supply, given the price of €759 per
unit.
• Consumers have chosen the optimal quantity of iPhones to buy, given the price of €759 per
unit.
9. Suppose you are living in a housing project that has 100 apartments. The housing project has its
own garden, swimming pool, library, and community center. To be able to utilize the available
amenities, residents must contribute €50 a month towards the upkeep while also taking turns
keep it clean. In this context, answer the following questions.
a. What is meant by free riding?
b. How would you define a free-riding resident? Why would it be a problem for the housing
project?
Answer:
a. A free rider is a person who receives the benefit of a good but avoids paying for it. People
tend to pursue their own private interests and usually don’t contribute voluntarily to the
public interest. For example, watching a pirated copy of a movie is cheaper than buying
one. Those who watch the pirated version are free riders because there are others who buy
the movie or pay for movie tickets. If everyone watched pirated copies, making movies
would not be profitable and the industry would not function.
b. In the situation described in the question, a free-riding resident would be a person or family
that does not contribute in terms of money and commitment to maintain the housing project
and keep it clean. In a way, this person is using the services being offered by the housing
project for free and is taking advantage of the other contributing residents. This is a problem
for the housing project because it will compel the paying residents to either eventually pay
more money for the upkeep of the garden, swimming pool, and other amenities, or they will
have to work more in any given week to keep it clean.
10. “Scarcity exists because people have unlimited wants in a world of limited resources.” Explain
this statement using a real-life example.
Answer: Since the world has limited resources, no one can have everything they want. Scarce
resources are things that people want, where the quantity desired exceeds the quantity that is
available. For example, emerging viral pandemics, such as the COVID-19 pandemic, may place
unexpectedly high and sustained demands on public healthcare systems and on various essential
, services. However, certain regions with large outbreaks may have fewer hospital beds and
ventilators, or smaller hospitals in rural areas may have less space and supplies to offer. Thus, the
demand for such items in these regions, especially during a pandemic, may exceed the resources
available, causing scarcity. These situations will create the need to ration supplies and interventions.
11. Identify the cause and the effect in the following phenomena in a hypothetical country:
a. A surge in the price of goods and an increase in the workers’ income.
b. A rise in GDP and an increase in the number of university graduates.
Answer:
a. The increase in income is likely to induce people to spend more, thus leading to a surge in
prices.
b. The increase in the number of university graduates in the country is likely to lead to higher
productivity, resulting in a rise in GDP.
PROBLEMS
1. You have purchased a non-refundable ticket to the Maldives with an early morning departure
scheduled for Saturday. You receive a call notifying you about an interview for a job that may
be scheduled around the same time. While you really wanted this job, you think that going on
the trip is more important for your mental wellbeing as you have been planning this trip for a
year now.
a. The human resources department from the company you applied to informs you that there is
only one slot available for the interview, which clashes with your flight. Should this affect
your decision to go on the trip? Explain by using the term “opportunity cost.
b. Suppose instead that you realize that the non-refundable travel ticket, which you already
purchased, cost you €100; previously you had mistakenly believed the price was €250.
Should learning this information affect your decision to go to the Maldives trip?
Answer:
a. This should affect your decision, or at least make you reconsider. The explicit cost of the
trip has not changed, nor has the benefit of the trip itself. However, the opportunity cost of
not making it to the interview is now higher than you previously thought.
b. This should not affect your decision. Whether you paid €100 or €250 in the past is irrelevant
to the costs and benefits that you can affect by going (or not going) on the trip.
2. You are thinking about buying a house in London. You find one you like that costs £1,000,000.
You learn that, based on the value of the house and your wages, your bank will give you a
mortgage for 20 years in the region of £600,000. This means that you must make a down
payment of £400,000. What are some of the monetary and non-monetary opportunity costs of
this purchase?
Answer: By using your £400,000 to buy the house, you give up the opportunity to earn interest on
that money. If you could earn 4% interest, then the opportunity cost is 0.04 × £400,000 = £16,000
per year. Also, if the value of the house increases (real increase) by 2% per annum, then the value of
your property will have increased by £20,000 a year (£1,000,000 × 1.02 = £1,020,000). Subtracting
the opportunity cost of £16,000, this indicates a gain of £4,000. However, you will also have to pay
mortgage. At a 4% mortgage, you will be paying £24,000 per annum. Under these conditions, you
will have to decide whether it makes sense for you to buy the house. Some of the non-monetary
opportunity costs include the benefits associated with a better neighborhood, such as accessibility to
public transport, shops, and schools.
