Solutions Manual - © 2013 by McGraw-Hill Education. This is propr...

Solutions Manual For Macroeconomics 9 th Edition By David Colander (All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Chapter 01: Economics and Economic Reasoning

© 2013 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.1-1

Chapter 1: Economics and Economic Reasoning

Questions and Exercises

• Coordination refers to how the three central problems facing any economy are

solved. Those three problems are what and how much to produce, how to produce, and for whom to produce. Inevitably, individuals desire more than is available in light of how much they’re willing to work, causing a problem of

scarcity. The concept of scarcity has two elements: our wants and our means of

fulfilling those wants. Those two elements are interrelated since wants are changeable and are partially determined by society and the means of fulfilling those wants. In addition, the degree of scarcity is constantly changing, depending on the available means of production and the development of new wants.Therefore, the author of the textbook focused on coordination instead of scarcity to emphasize the subsidiary nature of scarcity to the overall concept of coordination. Economics is not merely about our wants or the means of fulfilling those wants; it is also about reconciling our wants with reality, where reality consists of decision-making mechanisms, social customs, and political realities.

• Macro.
• Micro.
• Macro.
• Micro.
• Micro.
• Micro.

• Answers will differ. Two microeconomic problems are the pricing policies of

firms (price-fixing in particular) and the way wages are determined in labor markets. (Why do athletes and celebrities make so much money, anyway?) Two macroeconomic problems are unemployment and inflation (business cycles and growth are also macroeconomic problems).

• The opportunity cost of attending college is the sacrifice one must make to attend

college. It can be estimated by figuring out the benefit of the next-best alternative.If that alternative is working, one would guess the likely wage that could be earned at a job that does not require a college degree and then multiply by 40 hours for each week in college. The opportunity cost is also what could be done with the money used for tuition and other costs related to attending college.

• The opportunity cost of taking a course could be estimated by using the same

technique as in part a if you otherwise would be working during these hours. If you had taken another course instead, the opportunity cost would be the benefit you would have received from taking the other course.

• The opportunity cost of attending yesterday’s lecture would depend on what you

otherwise could have done with the time (sleep? eat lunch with an interesting person?). Although this is no longer a choice to you, past activities do have opportunity costs. 2 / 4

Chapter 01: Economics and Economic Reasoning

© 2013 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.1-2

• Answers will vary. A correct answer will indicate that the student compared the

marginal costs and benefits and chose the activity because the marginal benefit exceeded the marginal cost.

• The marginal costs are the additional costs. They are $0.15 per mile for miles

above 150 plus the cost of gas. Therefore, the marginal cost is $7.50 plus the cost of gas. The initial payment can be forgotten because it is a sunk cost; it is not part of marginal costs.

• No, since the marginal cost of drug control exceeds the marginal benefit;

government should not spend $4,170 to deter one person from using drugs.

• The opportunity cost of buying a $20,000 car is the benefit we would have gained

by using that $20,000 for the next-best alternative, which could be spending it on other goods and services or saving it.

• Only the marginal costs and benefits of taking the job are relevant. That means

that the sunk cost of the bachelor’s degree is irrelevant. Therefore, the relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay business school tuition. The relevant benefit is the increased lifetime earnings of $300,000.

• I would spend the $5 million on those projects which provide the highest marginal

benefit per dollar spent. The opportunity cost of spending the money on one project is the lost benefit that the college would have received by spending it on a different project. Thus, another way to restate the decision rule is to spend the money on the project that minimizes opportunity cost per dollar.

• Answers will differ. Two examples of social forces are our unwillingness to

charge friends interest and our unwillingness to “buy” dates with other people.These issues are still subject to economic forces; however, there is no market in dates or in loans to friends, and so the economic force does not become a market force.

• Answers will differ. Two examples of political or legal forces are rent control

laws and restrictions on immigration. Both prevent the invisible hand from working. Rent control laws place a price ceiling on rent, causing shortages of apartments, and immigration restrictions cause the number of immigrants seeking entry to exceed the number allowed to enter, which tends to cause wage rates to differ among countries.

• a. Both parties benefit. The person who gains the kidney benefits if it works when

transplanted into his or her body and will no longer have the emotional and 3 / 4

Chapter 01: Economics and Economic Reasoning

© 2013 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.1-3 financial burden of dialysis. The person selling the kidney gains the $30,000.Their gains will also have impacts on others (their families, for example).

• Both parties must undergo surgery and face all the attendant risks and costs. The

seller also faces the potential cost of a future illness or injury harming his or her only remaining kidney, causing the seller to need dialysis.

• Whether a society should allow this transaction is a question of value judgments

and cultural norms. Our society has chosen not to allow such transactions because (among other reasons) those with more money would have increased access to organs and therefore would have advantages over those of limited means, and thus the poor could be exploited in such transactions.

• An economic model is a framework that places the generalized insights of a

theory in a more specific contextual setting. Policy makers need to understand the empirical evidence supporting the theory as well as real-world economic institutions to make policy recommendations.

• No. Economic theory proves nothing about what system is best. It simply

provides ways to look at systems and indicates what the advantages and disadvantages of various systems probably will be. Normative decisions about what is best can only follow from one’s value judgments.

• A theorem is a proposition that is logically true based on the assumptions of the

model, whereas a precept is a policy rule that a particular course of action is preferable. Economists can agree about theorems but disagree about precepts if they have different value judgments about appropriate goals.

• A normative statement reflects ethical judgments about what should be. It reflects

values. A positive statement refers to a fact or a logical relationship. It is in principle testable or is the result of logic analysis. Positive statements of fact are not subject to debate among educated individuals. The art of economics refers to issues of judgment on how to achieve the goals determined in normative economics, giving the facts and logical relationships one finds in positive economics. Art of economics statements are subject to debate.

• a. Positive statement since it is a statement of fact.
• Normative.
• Since this is relating a normative goal to a decision, this could be a statement in

the art of economics. It also could be seen as a normative statement if one interprets it as a normative imperative.

• Positive statement since it is a statement of fact.

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