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EXERCISES 1. Which statements are prescriptive? Which statements are descriptive? a. The government should take care of the poor. b. If the real wage increases, households will be willing to supply more labor. c. When people’s incomes decrease, they consume more cheap cuts of meat. d. We ought to consume fewer resources to protect the planet. e. Young people should purchase medical insurance because it is cheaper for young people than for old people. 2. Draw a budget line assuming disposable income equals $100, the price of a music download is $1, and the price of a chocolate bar is $5. On the same graph, draw another budget line assuming the same level of income but with the price of a music download equal to $2 and the price of a chocolate bar equal to $1. Explain how the budget sets differ. If you liked downloads but hated chocolate bars, which budget set would you prefer? 3. Consider a bundle consisting of 4 chocolate bars and 30 downloads (call it bundle A). Using the assumption that “more is better,” what bundles can we say are definitely preferred to bundle A? What bundles are definitely worse than bundle A? Show your answers on our usual kind of diagram (that is, a budget set diagram with chocolate bars and downloads on the axes). 4. If we observe that a household buys bundle A but not bundle B and we know that bundle B has more of every good than does bundle A, what can we say about the household’s preferences for bundle A and bundle B? What can we say about the household’s budget set? 5. (Advanced) Look at Table 3.7 "Preferences over Downloads and Chocolate Bars". The top part of the table lists four different bundles of downloads and chocolate bars. The bottom part of the table shows which bundle is preferred when we compare any two bundles. Look at bundle 1. The top part of the table tells us it contains 0 downloads and 20 chocolate bars. The first row of the bottom part of the table shows how this bundle compares to the other bundles. So this individual prefers bundle 1 to bundle 2 but also prefers both bundle 3 and bundle 4 to bundle 1. Do these preferences satisfy “more is better”? Are they consistent or can you find some contradictions? TABLE 3.7 PREFERENCES OVER DOWNLOADS AND CHOCOLATE BARS Bundle Downloads Consumption Chocolate Bar Consumption 1 0 20 2 100 0 3 50 10 4 110 30 Bundle Which Bundle Is Preferred When Comparing Bundles? Bundle 1 Bundle 2 Bundle 3 Bundle 4 1 — 1 3 4 2 1 — 2 4 3 3 2 — 3 4 4 4 3 — 6. Suppose income increases by 10 percent, but the price of a chocolate bar and the price of downloads both increase by 5 percent. Will the budget line shift inward or outward? Will the slope of the budget line change? 7. We explained the household demand curve and the law of demand by focusing on how a change in the price of a chocolate bar influences the quantity of chocolate bars demanded. Redo this discussion and the figures to illustrate how a change in the price of downloads will affect the demand for downloads and the demand for chocolate bars. 8. In our example, we noted that it was not possible for both chocolate bars and music downloads to be inferior goods. Suppose there were three goods: chocolate bars, music downloads, and tuna sushi. Is it possible now that chocolate bars and music downloads are both inferior goods? Could all three be inferior goods?
9. (Advanced) Suppose the government imposes a tax on chocolate bars. Draw a diagram that shows what happens to the budget set. If chocolate bars and downloads are both normal goods, can you say whether the consumption of chocolate bars will increase or decrease? What about the consumption of downloads? 10. Explain why a price increase in movie tickets causes the demand curve for chocolate bars to shift. 11. Suppose you are thinking of buying chocolate bars. Your marginal valuation of the seventh chocolate bar is $3. The price of a chocolate bar is $4. Should you buy more or fewer than seven bars? 12. Explain how the law of demand works in the case of a unit demand curve. 13. Can preferences include altruism or a regard for fairness and still exhibit rationality? 14. Using the data in Table 3.5 "United Kingdom Budget Study", create a pie graph of expenditure shares. How might you explain the differences in spending between younger households in the United States and the United Kingdom? How might you explain the differences in spending in 2005 between younger households and average households? 15. (Advanced) In discussing labor supply, we did not allow an individual to decide not to work. Yet we observe many individuals who could work but choose not to. How would you have to amend the discussion to include the choice of working or not working? 16. If you face a big exam this week, how might this influence your time allocation choice in Figure 3.14 "The Time Budget Constraint"? 17. (Advanced) If there is a reduction in the price of a chocolate bar, what does our theory predict will happen to labor supply? 18. (Advanced) Suppose the government imposes a tax on labor. What will that tax do to the labor supply of a household and its demands for downloads and chocolate bars? 19. (Advanced) If one member of a two-person household gets a raise, what will that do to the hours worked by that person and to the other household member? Explain this using income and substitution effects. Could this raise cause the other household member not to work at all? Economics Detective 1. Search the Internet to find the level of spending by Japanese households on food in a recent year. Convert this figure to dollars. 2. The data in Table 3.4 "Budget Shares in the United States" come from a survey. Who was surveyed? How frequently? 3. Go to the web page of the Office for National Statistics in the United Kingdom (http://www.statistics.gov.uk/CCI/Nscl.asp? ID=5407&Pos=1&ColRank=1&Rank=16UK) and create a version of Table 3.5 "United Kingdom Budget Study" for different income groups. What differences do you see in spending patterns across income groups? How would you explain the differences in spending patterns as income changes? 4. Go to http://www.bls.gov/tus. Pick two years. Prepare a table to illustrate how the allocation of time has changed for one of two age groups over these two years. How might you explain these changes? Spreadsheet Exercise 1. (Advanced) Create a spreadsheet to reproduce the graph of a budget constraint with two goods (chocolate bars and downloads) in Figure 3.4 "The Budget Line". In column A, put the quantity of chocolate bars (from 0 to 20). In column B, put the price of a chocolate bar (that is, each cell should contain a 5).This is the simplest but not the most elegant way to create this spreadsheet. If you are an experienced user of spreadsheets, you may know tricks that will allow you to create the spreadsheet in a more compact way. In column C, put the price of downloads. In column D, put income. Then write an equation to enter in each cell of column E, based on the budget line. This equation should calculate the quantity of downloads in terms of the prices, income, and the quantity of chocolate bars. Make sure that you allow only nonnegative quantities of the goods. Use this to graph the budget line. Now try changing the prices and the level of income and make sure you can explain how the budget line shifts as income and prices change. Life Choices Chapter 4 Life Decisions Some economic decisions, like how to spend your money and your time, are everyday decisions.See Chapter 3 "Everyday Decisions" for more discussion. There are also bigger and more difficult economic decisions that you confront only occasionally. In the months and years after graduation, you will face major life choices, such as the following:
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Figure 5.11 Obtaining the Market Su
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Figure 5.13 Supply and Demand When
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Figure 5.15 Surplus in Equilibrium
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Inspired by the craigslist posts th
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Toolkit: Section 17.12 "Production
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Figure 5.20 Hannah’s Production P
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Figure 5.22 Julio and Hannah’s Pr
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frontier has slope −3/2, as Hanna
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EXERCISES 1. Would you expect to ge
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6.1 The Goal of a Firm LEARNING OBJ
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Figure 6.3 The Profits of a Firm We
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Price ($) Quantity 0 100 2 90 4 80
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Figure 6.6 The Elasticity of Demand
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Figure 6.8 Finding the Demand Curve
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Figure 6.10 Revenues Gained and Los
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Figure 6.12 Marginal Revenue and De
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CHECKING YOUR UNDERSTANDING 1. Earl
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Figure 6.15 An Example of a Cost Fu
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Figure 6.17 Setting the Price or Se
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4. If the optimal price is less tha
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6.5 The Supply Curve of a Competiti
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Table 6.5 Costs of Production: Incr
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EXERCISES 1. We suggested that a gr
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Tigers’ Merchandise Off to Roarin
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One way to summarize this behavior
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We typically expect that marginal c
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Figure 7.5 Market Equilibrium In a
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Figure 7.6 A Shift in the Supply Cu
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Comparative Statics The approach th
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the conclusion that the news should
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But this is exactly what happens in
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The example in Table 7.4 "Calculati
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Figure 7.15 Surplus Away from the M
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The demand for credit decreases as
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Toolkit: Section 17.3 "The Labor Ma
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KEY TAKEAWAYS The supply-and-demand
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Figure 7.21 An Increase in Marginal
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KEY TAKEAWAYS Even if markets are n
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The supply-and-demand framework can
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Figure 8.2 Walmart: Growing Jobs? S
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demand in the labor market. In the
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Figure 8.5 The Technology of a Firm
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marginal product of labor. In creat
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Figure 8.8 The Cost Function The co
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We can see from this equation that
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Figure 8.12 The Effect of a Change
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Figure 8.14 The Effect of a Change
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Production" are based on the follow
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Suppose you ask this question just
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Specifically, we can divide entry c
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to a job offer is very important fo
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Another source of bargaining power
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Steven J. Davis, John C. Haltiwange
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EXERCISES 1. A statistic called “
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Road Map This chapter begins with a
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stocks traded in an exchange that s
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The Foreign Exchange Market Further
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Toolkit: Section 17.5 "Discounted P
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Outcome (Number of Oranges) Probabi
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KEY TAKEAWAYS The value of an asset
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The supply side is shown in part (a
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We have also discovered that, in ge
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There are a couple of possible answ
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caution: even if markets are not al
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Figure 9.9 Equilibrium Asset Prices
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EXERCISES 1. List the factors you t
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Burger King in Georgia or Arby’s
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Road Map Because the minimum wage s
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The first increment of the proposal
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wage or the real equilibrium quanti
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Inflation and the Minimum Wage Alth
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In part (a) of Figure 10.9 "Deadwei
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Figure 10.11 The Employment Effect
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To talk about distribution, we need
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Figure 10.14 Effects of an Increase
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LEARNING OBJECTIVES 1. How do econo
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adults.) Figure 10.18 "Teenage Unem
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economists, particularly because th
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EXERCISES 1. List three jobs you th
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some value. In addition, if the mar
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29, 2007, accessed January 29, 2011
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Toolkit: Section 17.11 "Efficiency
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possible to start bringing supplies
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Suppose you want to purchase a book
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In part (a) of Figure 11.9 "Tax Inc
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looked at. Figure 11.12 The Differe
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Figure 11.13 The Production Possibi
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Tariffs Where quotas are the equiva
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unable to migrate, then the equilib
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“Hiding in the Shadows: The Growt
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EXERCISES 1. List three additional
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including taxes on the income peopl
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Figure 12.2 The Lorenz Curve The mo
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Table 12.4 "Gini Coefficient over T
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Measure 1989 Quintile 1994 Quintile
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KEY TAKEAWAYS The Lorenz curve show
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skills, but these are much more com
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Economic forces can mitigate discri
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CHECKING YOUR UNDERSTANDING 1. Draw
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Toolkit: Section 17.6 "The Credit M
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means that the total number of choc
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Incentives Redistribution is more t
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Not all transfers are public; some
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EXERCISES 1. Draw a Lorenz curve fo
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the Cuyahoga River in Ohio was so p
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We will get to Mexico City shortly.
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Social Dilemma Air pollution and se
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the time of other drivers on the ro
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associated with production by a fir
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permits from others. A firm with mo
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egulators simply need to calculate
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In 1999, the United Nations held an
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price of oil will increase. This is
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I am not at all prepared to dismiss
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excludable, then a modified version
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EXERCISES 1. In the example about s
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Busting Up Monopolies Working for A
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Figure 14.1 The Competitive Market
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When a firm is maximizing its profi
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Standard Oil Trust in 1911.Justia.c
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A jury trial led to an award of $4.
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monopoly profits. Notice that a fir
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current prices. This problem is esp
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demand curve. If firm A sets a pric
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Figure 14.7 The Payoffs (Profits) f
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Figure 14.9 The Demand Curve Facing
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Figure 14.12 The Markets for Both F
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authorities are too permissive in a
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EXERCISES 1. Suppose you have two t
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One hundred years ago, our knowledg
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Our diet also affects our probabili
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jobs are in service occupations. Th
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Figure 15.4 Payments to Hospitals a
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Toolkit: Section 17.7 "Expected Val
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Adverse Selection One complication
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more than you would if you had to p
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firms to earn a return on this inve
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KEY TAKEAWAYS Government interventi
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EXERCISES 1. Is health insurance a
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delay the purchase of a new car, ch
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(There is a subtlety you may be won
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Figure 16.3 "The Incidence of a Tax
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Figure 16.4 Idealized Effect of Goo
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What was the sticker price of the c
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Pricing is only one of many decisio
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pattern of trade is quite normal: m
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didn’t warn you.” When you see
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United States in 1978 and ultimatel
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Chapter 17 Microeconomics Toolkit I
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Figure 17.1 Individual Demand The M
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Figure 17.2 Labor Market Equilibriu
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next year” is $100. The value of
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For example, suppose you are offere
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Chapter 12 "Superstars" Chapter 16
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Chapter 15 "A Healthy Economy" 17.1
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market. Tax incidence is the way in
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Key Insights The production possibi
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Figure 17.11 Cost Measures Figure 1
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Comparative statics is a tool used
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Key Insights The production functio
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The Main Uses of This Tool Chapter
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Key Insights As the exchange rate i
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The concept of correlation is quite
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