Chapter 1

5. Indicate whether each of the following statements applies to microeconomics or

macroeconomics:
a. The unemployment rate in the United States was 4.9 percent in January 2008. (Macro)
b. A U.S. software firm discharged 15 workers last month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges
to rise.
d. U.S. output, adjusted for inflation, grew by 2.2 percent in 2007. (Macro)
e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1
percentage point.
f. The consumer price index rose by 2.8 percent in 2007. (Macro)
7. Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on
candy bars and bags of peanuts. The price of candy bars is $.75 and the price of peanuts is $1.50.

a. Construct a table showing the alternative combinations of the two products that are available.
b. Plot the data in your able as a budget line in a graph. What is the slope of the budget line?
What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these
opportunity costs rise, fall, or remain constant as each additional unit of the product is purchased.
c. How, in general, would you decide which of the available combinations of candy bars and
bags of peanuts to buy?
d. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your
diagram. Why would this budget line be preferable to the old one?
(a)

Consumption alternatives
Goods
Candy bars
Bags
of
peanuts

A
0
10

B
4
8

C
8
6

D
12
4

E
16
2

F
20
0

b)
Ba gs of
Peanuts

10

.75
Slope
1.5 .5

20

Candy Bars

The slope for the budget line above, with candy bars on the horizontal axis, is -0.5 (=
-Pcb/Pbp). Note that the figure could also be drawn with bags of peanuts on the horizontal
axis. The slope of that budget line would be -2.
The opportunity cost of one more candy bar is of a bag of peanuts. The opportunity cost of
one more bag of peanuts is 2 candy bars. These opportunity costs are constant. They can be
found by comparing any two of the consumption alternatives for the two goods.
(c) The decision of how much of each to buy would involve weighing the marginal benefits and
marginal costs of the various alternatives. If, for example, the marginal benefits of moving

from alternative C to alternative D are greater than the marginal costs, then this consumer
should move to D (and then compare again with E, and so forth, until MB=MC is attained).
(d)
B ags of
P eanuts
Inc om e = $ 15

20

Inc o me = $30

10

20

40

Ca ndy Ba rs

The budget line at $30 would be preferable because it would allow greater consumption of both
goods.

10. Below is a production possibilities table for consumer goods (automobiles) and capital goods
(forklifts):
TypeofProduction

a.
Automobiles
Forklifts

ProductionAlternatives
A

0
30

2
27

4
21

6
12

8
0

Show these
data
graphically.
Upon
what

specific assumptions is this production possibilities curve based?

See curve EDCBA. The assumptions are full employment, fixed supplies of resources, fixed
technology and two goods.

Forklifts

Chapter 2
9. Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A.
Suppose also that each of the three techniques shown in the table below will produce the desired output:
LO3
a. With the resource prices shown, which technique will the firm choose? Why? Will production using
that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry
expand or contract? When will that expansion or contraction end?

Answer: To calculate the cost of each technique, multiply the price per unit of resource by the
amount of the resource employed by the technique and add these together. For example, the cost
of technique 1 equals $3 x 5 (labor cost) + $4 x 2 (land cost) + $2 x 2 (capital cost) + $2 x 4
(entrepreneurial cost) = $15 + $8 + $4 + $8 = $35. The same process is applied to Techniques 2
and 3. The firm will choose technique 2 because it produces the output at the least cost ($34
compared to $35 for techniques 1 and 3). Economic profit will be $6 (= $40 - $34), causing the
industry to expand. Expansion in this industry will continue until prices decline to where total
revenue equals total cost of $34 and no additional firms will want to enter the industry.
12. In a sentence, describe the meaning of the phrase invisible hand. LO4
Answer: Market prices act as an invisible hand, coordinating an economy by rationing what is
scarce and providing incentives to produce the most desired goods and services.
14. Distinguish between the resource market and the product market in the circular flow model.
In what way are businesses and households both sellers and buyers in this model? What are the
flows in the circular flow model? LO5
Answer: The resource markets are where the owners of the resources (the households) sell their
resources to the buyers of the resources (businesses). In the product markets, businesses sell the
goods and services they have produced to the buyers of the goods and services, the households.
Households (individuals) either own all economic resources directly or own them
indirectly through their ownership of business corporations. These households are willing to sell
their resources to businesses because attractive prices draw them into specific resource markets.
Businesses buy resources because they are necessary for producing goods and services. The
interaction of the buyers and sellers establishes the price of each resource.
In the product market, businesses are the sellers and householders are the buyers; their
role in the market has been reversed. Each group of economic units both buys and sells.