Solutions Manual
Microeconomics, 11th Edition Canadian
By
Christopher T.S. Ragan,
Richard G. Lipsey
( All Chapters Included - 100% Verified Solutions )
1
,_______________________________________
Chapter 1: Economic Issues and Concepts
_______________________________________
Answers to Study Exercises
Question 1
Microeconomics is the study of the allocation of resources within and across individual markets,
and the determination of relative prices and quantities. Macroeconomics is the study of the
determination of aggregates such as aggregate output, employment, the price level, the
unemployment rates, and the exchange rate.
Question 2
Traditional systems: Behaviour is based primarily on tradition, custom, and habit.
Command systems: Decisions about production and consumption are determined by a central
planning authority.
Free-market systems: Production and consumption decisions are made privately, by
decentralized producers and consumers.
Mixed systems: Economic systems in which there are elements of tradition, command, and free
markets.
Question 3
Scarcity: The production possibilities boundary (PPB) separates attainable combinations of
goods from those that are unattainable. Thus scarcity is shown by the existence of some
unattainable bundles of goods.
Choice: Because of scarcity, societies must somehow choose how resources are to be allocated;
thus a particular point on the PPB must be chosen.
Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is
unavoidable every time a choice is made. For the economy as a whole, the decision to produce
more of one good must involve a decision to produce less of some other good.
Question 4
a) At point A, 2.5 tonnes of clothing and 3 tonnes of food are being produced per year. At point
B, annual production is 2.5 tonnes of clothing and 7 tonnes of food. At point C, annual
production is 6.5 tonnes of clothing and 3 tonnes of food.
2
,b) At point A the economy is either using its resources inefficiently or it is not using all of its
available resources. Point B and C represent full and efficient use of available resources because
they are on the PPB.
c) At point B, the opportunity cost of producing one more tonne of food (and increase from 7 to
8) is the 2.5 tonnes of clothing that must be given up. The opportunity cost of producing one
more tonne of clothing (from 2.5 to 3.5) appears, from the graph, to be approximately 0.75
tonnes of food.
d) Point D is unattainable given the economy’s current technology and resources. Point D can
become attainable with a sufficient improvement in technology or increase in available
resources.
Question 5
Since individual abilities differ, specializing allows each person to focus their energies on what
they do best, leaving everything else to be done by others. As a result, total output will rise. In
addition, as people specialize, they often “learn by doing” and become even better at their
specific task. Thus specialization often leads to improvements in ability that would not otherwise
occur.
Question 6
a) As the table shows, there are only 250 workers in Choiceland, and to construct the production
possibilities boundary we must imagine all the combinations of workers in each sector. Using the
two middle columns from the table, we can plot the output levels on a graph to get the following:
3
, b) If the economy is already producing 60 units of X and 600 units of Y, then 10 extra units of X can only be
produced by reducing the production of Y by 250 units. The opportunity cost of 10 units of X is therefore 250 units
of Y (or 25 units of Y per unit of X). If the economy is already producing 70 units of X, the opportunity cost of
producing an additional 5 units of X is the forgone 350 units of Y (or 70 units of Y per unit of X). Thus, we see that
the opportunity cost of X rises when more of X is already being produced.
c) If any given amount of labour can now produce 10 percent more of good Y, then the PPB shifts up in a particular
way. Specifically, the Y values increase by 10 percent for any given X value, as shown below.
Question 7
The diagram in part (c) of Question 6 shows immediately why a technological improvement in one industry means
that a country can now produce more of both goods. Since the PPB has shifted up (or out), there are many
combinations of goods that are now available that were not before, and some of these involve producing more of
4
Microeconomics, 11th Edition Canadian
By
Christopher T.S. Ragan,
Richard G. Lipsey
( All Chapters Included - 100% Verified Solutions )
1
,_______________________________________
Chapter 1: Economic Issues and Concepts
_______________________________________
Answers to Study Exercises
Question 1
Microeconomics is the study of the allocation of resources within and across individual markets,
and the determination of relative prices and quantities. Macroeconomics is the study of the
determination of aggregates such as aggregate output, employment, the price level, the
unemployment rates, and the exchange rate.
Question 2
Traditional systems: Behaviour is based primarily on tradition, custom, and habit.
Command systems: Decisions about production and consumption are determined by a central
planning authority.
Free-market systems: Production and consumption decisions are made privately, by
decentralized producers and consumers.
Mixed systems: Economic systems in which there are elements of tradition, command, and free
markets.
Question 3
Scarcity: The production possibilities boundary (PPB) separates attainable combinations of
goods from those that are unattainable. Thus scarcity is shown by the existence of some
unattainable bundles of goods.
Choice: Because of scarcity, societies must somehow choose how resources are to be allocated;
thus a particular point on the PPB must be chosen.
Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is
unavoidable every time a choice is made. For the economy as a whole, the decision to produce
more of one good must involve a decision to produce less of some other good.
Question 4
a) At point A, 2.5 tonnes of clothing and 3 tonnes of food are being produced per year. At point
B, annual production is 2.5 tonnes of clothing and 7 tonnes of food. At point C, annual
production is 6.5 tonnes of clothing and 3 tonnes of food.
2
,b) At point A the economy is either using its resources inefficiently or it is not using all of its
available resources. Point B and C represent full and efficient use of available resources because
they are on the PPB.
c) At point B, the opportunity cost of producing one more tonne of food (and increase from 7 to
8) is the 2.5 tonnes of clothing that must be given up. The opportunity cost of producing one
more tonne of clothing (from 2.5 to 3.5) appears, from the graph, to be approximately 0.75
tonnes of food.
d) Point D is unattainable given the economy’s current technology and resources. Point D can
become attainable with a sufficient improvement in technology or increase in available
resources.
Question 5
Since individual abilities differ, specializing allows each person to focus their energies on what
they do best, leaving everything else to be done by others. As a result, total output will rise. In
addition, as people specialize, they often “learn by doing” and become even better at their
specific task. Thus specialization often leads to improvements in ability that would not otherwise
occur.
Question 6
a) As the table shows, there are only 250 workers in Choiceland, and to construct the production
possibilities boundary we must imagine all the combinations of workers in each sector. Using the
two middle columns from the table, we can plot the output levels on a graph to get the following:
3
, b) If the economy is already producing 60 units of X and 600 units of Y, then 10 extra units of X can only be
produced by reducing the production of Y by 250 units. The opportunity cost of 10 units of X is therefore 250 units
of Y (or 25 units of Y per unit of X). If the economy is already producing 70 units of X, the opportunity cost of
producing an additional 5 units of X is the forgone 350 units of Y (or 70 units of Y per unit of X). Thus, we see that
the opportunity cost of X rises when more of X is already being produced.
c) If any given amount of labour can now produce 10 percent more of good Y, then the PPB shifts up in a particular
way. Specifically, the Y values increase by 10 percent for any given X value, as shown below.
Question 7
The diagram in part (c) of Question 6 shows immediately why a technological improvement in one industry means
that a country can now produce more of both goods. Since the PPB has shifted up (or out), there are many
combinations of goods that are now available that were not before, and some of these involve producing more of
4
