Solutions Manual - Chapter 2 Economic Science: Using Data and Mode...

Solutions Manual Brooks Wilson Macroeconomics Third Edition Daron Acemoglu David Laibson John List 1 / 4

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Table of Contents Chapter 1 The Principles and Practice of Economics 1

Chapter 2 Economic Science: Using Data and Models to Understand the World 8

Chapter 3 Optimization: Trying to Do the Best You Can 17

Chapter 4 Demand, Supply, and Equilibrium 26 Chapter 5 The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates 41 Chapter 6 Aggregate Incomes 58 Chapter 7 Economic Growth 72 Chapter 8 Why Isn’t the Whole World Developed? 89 Chapter 9 Employment and Unemployment 101 Chapter 10 Credit Markets 125 Chapter 11 The Monetary System 139 Chapter 12 Short-Run Fluctuations 152 Chapter 13 Countercyclical Macroeconomic Policy 166 Chapter 14 Macroeconomics and International Trade 178 Chapter 15 Open Economy Macroeconomics 192 Answers to the Evidence-Based Problems by Chapter 209 2 / 4

Chapter 1 The Principles and Practice of Economics Questions 1.Why do we have to pay a price for most of the goods we consume?Answer: The inputs we use to produce most goods and services (for example, capital and labor) are scarce. Therefore, almost all goods and services are scarce compared to the quantity that consumers want to consume. In other words, at a price of zero the demand for most goods is higher than the available supply; our wants are unlimited, but our resources are not. Prices act as a rationing mechanism to prevent the over-consumption of such scarce goods, making them available in the quantity such that the supply of these goods matches the demand.

2.Many people believe that the study of economics is focused on money and financial markets.Based on your reading of the chapter, how would you define economics?Answer: Economics is the study of how agents (for example, households and firms) choose to allocate scarce resources and how these choices affect society. Although it is true that economics studies money and the financial markets, the study of economics is really focused on human behavior and choices. Given that we have limited resources, we need to choose between various options. Economic analysis is used to understand people’s choices in order to describe what people do and recommend what people ought to do.

3.Examine the following statements and determine if they are normative or positive in nature.Explain your answer.a.Car sales in Europe rose 9.3 percent from 2014 to 2015.b.The U.S. government should increase carbon taxes to control emissions that cause global warming.

Answer:

a.This is an objective statement about the rate of growth in the European automotive industry. Positive economics is analysis that generates objective descriptions or predictions about the world that can be verified with data. Since data can be used here to verify the rate of growth, this is a positive statement.b.The statement that the government should increase carbon taxes to control emissions is normative since it states what the government ought to do. Normative economics advises individuals and society on their decisions and is almost always dependent on subjective judgments.

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.

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Chapter 1 | The Principles and Practice of Economics 2 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.What does a budget constraint represent? How do budget constraints explain the trade-offs that consumers face?Answer: A budget constraint is an equation representing the goods or activities that a consumer can choose given her limited budget. Tradeoffs arise when some benefits must be given up in order to gain others. In other words, a trade-off occurs when you give one thing up to get something else. Since a budget constraint shows the set of things that you can choose to do or buy with a fixed amount of money, it also shows that if you choose to buy more of one good, you will have to buy less of another. Therefore, a budget constraint equation implies that a consumer faces a tradeoff.

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.The costs of many environmental regulations can be calculated in dollars—for instance, the cost of “scrubbers” that reduce the amount of air pollution emitted by a coal factory. The benefits of environmental regulations often are most directly expressed in terms of lives saved (reduced mortality) or decreases in the incidence of a particular disease (reduced morbidity). What does this imply about the cost-benefit analysis of environmental regulations? There is an old saying “You can’t put a price on a human life.” Do you agree or disagree? Explain.Answer: Cost-benefit analysis can be used when there is a common unit, such as dollars. This method is less straightforward if there are two different units of measurement, such as dollars and lives. However, if a direct link can be drawn between dollars spent and lives saved then cost- benefit analysis becomes feasible. When an environmental regulator places a value of 3 million dollars on a human life (for example), they are claiming that if 3 million dollars is not spent in one area, then it can instead be spent in another area where 3 million dollars is expected to save one life, on average. While some people may find this practice controversial, it does provide the most practical way to maximize the number of lives saved, given limited financial resources..

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