SOLUTIONS MANUAL - So lutions Manual. Answers to the Review Quizze s

SOLUTIONS MANUAL

MicroECONOMICS Canada in th e Global Environment Ninth Edition Michael Parkin Robin Bade (All Ch apters Download Link at the end of this file) 1 / 4

So lutions Manual.Answers to the Review Quizze s Page 2 1.List some examples of the scarcity that you face.Examples of scarcity common to students include not enough income to afford both tuition and a car, not enough learning capacity to study for both an economics exam and a chemistry exam in one night, and not enough time to allow extensive studying and extensive socializing.

2.Find examples of scarcity in today’s headlines.A headline in the National Post on May 5, 2014 was “Porter Airlines to charge passengers first bag fee starting May 14.” Porter Airlines plans to charge between $25 and $28.25 for the first checked bag. Scarcity is our inability to satisfy all our wants. With the bag fee, a passenger faces scarcity because she has less money to satisfy other wants. Without the fee, Porter Airlines faces scarcity because it will be unable to offer other services.

3.Find an example of the distinction between microeconomics and macroeconomics in today’s headlines.Microeconomics: On May 5, 2014, a headline in the National Post was “Check your gambling: Canadians betting $210-million on NHL playoffs.” This story covers a microeconomic topic because it discusses choices made by individuals and their gambling responses to the NHL playoffs.Macroeconomics: On May 5, 2014, a headline in the National Post was “Canadian dollar seen sliding below 80₵ by Mark Carney’s protégé.” This story covers a macroeconomic topic because it concerns the effect of the Canadian and world economy on the Canadian dollar.Page 7 1.Describe the broad facts about what, how, and for whom goods and services are produced.What we produce varies over time. In Canada today, services account for 78 percent of production, manufactured goods for 20 percent, and agriculture for 2 percent. What we produce also varies over countries. Agriculture and manufacturing are small percentages of production in rich countries and large percentages of production in poorer countries.How goods and services are produced is by businesses determining how the factors of production, land, labour, capital, and entrepreneurship, are combined to make the goods and services we consume. Land includes all natural resources, both renewable natural resources such as wood, and nonrenewable natural resources such as natural gas. The quality of labour depends on human capital. In Canada in 2013, 25.3 percent of the adult population had a university degree, a further 39 percent had some post-secondary education, and 93.6 percent had completed high school.1

WHAT IS

ECONOMICS?

Chapter 2 / 4

2 CHAPTER 1

So lutions Manual.For whom goods and services are produced depends on the incomes that people earn.People with large incomes can buy a wide range of goods and services. People with small incomes can afford a smaller range of goods and services.

• Use headlines from the recent news to illustrate the potential for conflict between

self-interest and the social interest.One example of an issue that illustrates the potential for conflict between self-interest and the social interest is the proposed Keystone Pipeline. In the National Post on May 5, 2014, the headline “Keystone XL Pipeline delays threatening hundreds of TransCanada jobs, CEO Russ Gurling says” appears. The potential for conflict exists between the self-interest of the potential workers whose employment is being delayed and the social interest of those concerned about the environment.Page 10

• Explain the idea of a tradeoff and think of three tradeoffs that you have made

today.A tradeoff is an exchange—giving up one thing to get something else. What is given up is the opportunity cost of whatever is obtained. Three examples of tradeoffs are: a) When a student sleeps in rather than going to his early morning economics class, the student trades additional sleep for study time. The opportunity cost of the decision is a lower grade on the exam. b) When a student running late for class parks her car illegally, the student trades saving time for the risk of a ticket. The potential opportunity cost of the decision is the goods and services that cannot be purchased if the student receives an expensive parking ticket. c) A student trades higher income by spending time during the day working at a part-time job for less time spent at leisure time and study. The opportunity cost of the higher income is less leisure and lower grades in classes.

• Explain what economists mean by rational choice and think of three choices that

you’ve made today that are rational.A rational choice is one that compares the costs and benefits and achieves the greatest benefit over cost for the person making the choice. Three rational choices are: a) The choice to skip breakfast to go to class. In this case the benefit is the higher grade in the class and the cost is the breakfast forgone. b) The choice to stop talking with a friend on the phone and start studying for an impending exam. In this case the benefit is the resulting higher grade in the class and the cost is the conversation forgone. c) The choice to do laundry today rather than watch television. In this case the benefit is clean clothes to wear and the cost is the loss of the entertainment the television show would have provided.

• Explain why opportunity cost is the best forgone alternative and provide

examples of some opportunity costs that you have faced today.When a decision to undertake one activity is made, often many alternative activities are no longer possible. Often these activities are mutually exclusive so only the highest-valued alternative is actually forgone. For instance, the decision to go to a student’s 8:30 AM class eliminates the possibility of sleeping in during the hour and of jogging during the hour. But in this case, it is impossible to both sleep in and to jog during the hour, so the opportunity cost of attending class cannot be both activities. The opportunity cost of attending class is only the activity that otherwise would have been chosen—either sleeping in or jogging—whatever activity is the most highly valued of the forgone alternatives. 3 / 4

So lutions Manual.

WHAT IS ECONOMICS? 3

• Explain what it means to choose at the margin and illustrate with three choices at

the margin that you have made today.Choosing at the margin means choosing to do a little more or a little less of some activity. Three examples are: a) When a student faces a chemistry and an economics final exam in one day, the student must determine whether spending the last hour studying a little more chemistry or a little more economics will yield a better contribution (marginal benefit) to his overall GPA. b) A student buying a computer must decide whether the marginal benefit of adding 1 GB of additional memory is worth the marginal cost of the additional memory. c) A student football fan with a choice of a cheap seat in the student bleachers located at the far end of the playing field or a more expensive seat located on the 30 yard line must determine whether the marginal benefit of watching the game from a better seat is worth the marginal cost of the higher ticket price.

• Explain why choices respond to incentives and think of three incentives to which

you have responded today.People making rational decisions compare the marginal benefit from an action to its marginal cost.A person’s choice changes when the incentive—the marginal benefit or the marginal cost changes.Examples of incentives are: a) A student studies because of the incentives offered by grades. b) A student is more likely to attend a class if attendance is factored into the grade. c) A student might attend a meeting of a club if the student’s significant other is eager to attend the meeting.Page 11

• Distinguish between a positive statement and a normative statement and provide

examples.A positive statement is about what is. It is testable. A normative statement about what ought to be.It is not testable because there is no universally approved criterion by which the statement can be judged. “I will receive an A for this course,” is a positive statement made by an economics student—it might not be true, but it is testable. “I will receive a good grade for this course,” is a normative statement. Whether someone agrees with it depends on his interpretation of what makes for a “good” grade.

• What is a model? Can you think of a model that you might use in your everyday

life?A model is a description of some aspect of the world. An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. An example of a model is a GPS map. It reflects only those aspects of the real world that are relevant to the user in reaching her destination and avoids information irrelevant to travel.

• How do economists try to disentangle cause and effect?

Economists disentangle cause and effect by using natural experiments (situations in the ordinary course of economic life in which the one factor of interest is different and other things are equal or similar); conducting statistical investigations to find correlations; and performing economic experiments by putting people in decision-making situations and varying the influence of one factor at a time to discover how they respond.

• How is economics used as a policy tool?

Individuals, businesses, and governments use economics as a policy tool. Individuals use the economic ideas of marginal benefit and marginal cost when making decisions for such topics as attending college, paying cash or credit for a purchase, and working. Businesses also use the concepts of marginal benefit and marginal cost when making decisions about what to produce, how to produce, and how many hours to stay open. Governments use marginal benefit and marginal cost when deciding issues such as the level of property taxes, the amount to fund higher education, or the level of a tariff on EU imports.

• / 4