SOLUTIONS TO TEXTBOOK PROBLEMS

Principles of Microeconomics, 8th Canadian Edition, 8e Gregory Mankiw, Ronald Kneebone, Kenneth McKenzie

(Solutions Manual All Chapter)

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Copyright © 2020 Nelson Education Ltd.Chapter 1 Ten Principles of Economics

SOLUTIONS TO TEXTBOOK PROBLEMS

Quick Quizzes

1 . Describe an important tradeoff you recently faced. • Give an example of some action that has both a monetary and nonmonetary opportunity cost. • Describe an incentive your parents and/or guardians offered to you in an effort to influence your behaviour .

Usually students are able to come up with standard examples of tradeoffs: buy a textbook instead of a ticket to a favourite performance, go to a group study session instead of a birthday party, etc. Instructors may wish to point out less straightforward instances of how the principles work. For instance, when discussing incentives instructors may point out perverse effects of incentives. Other examples include the invention of the seat belt, or crosswalk countdown signals, discussed in the text. Examples of actions that have both monetary and nonmonetary opportunity costs are watching a movie (time + money) and driving a car (money + pollution + traffic congestion). Parents and/or guardians may offer their children gifts conditional on good results in school.

2.Why is a country better off not isolating itself from all other countries? • Why do we have markets and, according to economists, what roles should government play in them?

A country is better off not isolating itself from other countries for the simple reason that doing so would prevent it from engaging in mutually beneficial trade, which gives consumers access to more diverse and cheaper products.

Markets are usually a good way of organizing economic activity because they allocate resources to their most efficient use, maximizing the size of the economic pie. This is because market prices convey information about the scarcity of various resources, which provides important signals to consumers and producers when making their decisions.

A fundamental role of government is to define and enforce property rights for scarce resources, to allow markets to work in an efficient manner. In some cases, however, markets may nonetheless fail to allocate resources in an efficient manner, and governments can intervene to improve market outcomes. This is the case when market failures exist, such as externalities and market power.

Another role for government can be to address concerns about the equitable distribution of the economic pie. While in the absence of market failures markets will lead to an efficient outcome (maximizing the size of the economic pie), there is no guarantee that the outcome will be equitable (result in a fair distribution of the pie). Governments can therefore play a role in pursuing equity objectives. However, this often requires interventions that may impinge upon efficiency, shrinking the overall size of the economic pie; thus the notion of the efficiency-equity tradeoff.

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2 • Chapter 1: Ten Principles of Economics

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3.List and briefly explain the three principles that describe how the economy as a whole works.

The three principles that describe how the economy as a whole works are: (1) a country’s standard of living depends on its ability to produce goods and services; (2) prices rise when the government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A country’s standard of living depends on its ability to produce goods and services, which in turn depends on its productivity, which is a function of the education of workers and the access workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run tradeoff between inflation and unemployment that is only temporary, and policymakers have some ability to exploit this relationship using various policy instruments.

Questions for Review

1.What is a tradeoff? Give two examples of tradeoffs that you face in your life.

A tradeoff is what you give up in order to get something else. Examples of tradeoffs include time tradeoffs (such as studying one subject over another, or studying at all compared to engaging in social activities), and spending tradeoffs (such as whether to use your last $15 to purchase a pizza or to buy an online study guide for that tough economics course).

2.What is the opportunity cost of seeing a movie?

The opportunity cost of seeing a movie includes the monetary cost of admission plus the time cost of going to the theatre and attending the show. The time cost depends on what else you might do with that time; if it’s staying home and watching TV, the time cost may be small, but if it’s working an extra three hours at your job, the time cost is the money you could have earned.

3.Water is necessary for life. Is the marginal benefit of a glass of water large or small?

The marginal benefit of a glass of water depends on your circumstances. If you’ve just run a marathon, or you’ve been walking in the desert sun for three hours, the marginal benefit is very high. But if you’ve been drinking a lot of liquids recently, the marginal benefit is quite low. The point is that even the necessities of life, like water, don’t always have large marginal benefits.

4.Why should policymakers think about incentives?

Policymakers need to think about incentives so they can understand how people will respond to the policies they put in place. The text’s examples of seat belts and crosswalk countdown signals show that policy actions can have quite unintended consequences. If incentives matter a lot, they may lead to a very different type of policy; for example, some economists have suggested putting knives in steering columns so that people will drive much more carefully! While this suggestion is silly, it highlights the importance of incentives.

5.Why isn’t trade among countries like a game, with some winners and some losers?

Trade among countries isn’t a game with some losers and some winners because trade can make everyone better off. By allowing specialization, trade between people and trade between countries can improve everyone’s welfare.

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Chapter 1: Ten Principles of Economics • 3

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6.What does the “invisible hand” of the marketplace do?

The “invisible hand” of the marketplace represents the idea that even though individuals and firms are all acting in their own self-interest, prices and the marketplace guide them to do what is good for society as a whole.

7.Explain the two main causes of market failure and give an example of each.

The two main causes of market failure are externalities and market power. An externality is the impact of one person’s actions on the well-being of a bystander, such as from pollution or the creation of knowledge. Market power refers to the ability of a single person (or small group of people) to unduly influence market prices, such as in a town with only one well or only one cable television company.

8.Why is productivity important?

Productivity is important because a country’s standard of living depends on its ability to produce goods and services. The greater a country’s productivity (the amount of goods and services produced from each hour of a worker’s time), the greater will be its standard of living.

9.What is inflation, and what causes it?

Inflation is an increase in the overall level of prices in the economy. Inflation is caused by increases in the quantity of a nation’s money.

10.How are inflation and unemployment related in the short run?

Inflation and unemployment are negatively related in the short run. Reducing inflation entails costs to society in the form of higher unemployment in the short run.

Quick Check Multiple Choice

• Economics is best defined as the study of which of the following?
• how society manages its scarce resources
• how to run a business most profitably
• how to predict inflation, unemployment, and stock prices
• how the government can stop the harm from unchecked self-interest

• What is your opportunity cost of going to a movie?
• the price of the ticket
• the price of the ticket plus the cost of any soda and popcorn you buy at the theatre
• the total cash expenditure needed to go to the movie plus the value of your time
• zero, as long as you enjoy the movie and consider it a worthwhile use of time and money

• Which of the following describes a marginal change?
• one that is NOT important for public policy
• one that incrementally alters an existing plan
• one that makes an outcome inefficient
• one that does NOT influence incentives
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