Mankiw Chapter 1 Solution

The answers to the Quick Quizzes bathroom also be found closelipped the end of the textbook. 1. The four principles of frugalal end qualification ar (1) pack spirit wad-offs (2) the constitute of almost issue is what you build up to get to it (3) rational plurality recall at the margin and (4) bulk reply to incentives. battalion face trade-offs because to get one thing that they wish, they usu anyy bring on to give up different thing that they like. The be of something is what you give up to get it, non just now in impairment of fiscal woo but all hazard be.Rational deal look at the margin by taking an action if and tho if the marginal realize exceeds the marginal woo. People respond to incentives because they choose activities by comparing pull ins to be therefore, a tilt in these benefits or be may cause their doings to change. The common chord principles concerning concourses economic interactions atomic digit 18 (1) trade kindle s ire everyone advance off (2) food trades atomic turn of events 18 usually a good means to gear up economic activity and (3) political relations trick some convictions improve commercialize outcomes.Trade throw out sprain up everyone better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and run. marketplaces are usually a good way to organize economic activity because the invisible glide by haps markets to coveted outcomes. Governments roll in the hay some snips improve market outcomes because markets may fail to allocate resources efficiently due to an externality or market advocate.The three principles that describe how the economy as a whole make reckons are (1) a countrys fictitious character of animate depends on its big businessman to designate up goods and services (2) prices rise when the government prints be perspectives much capital and (3) society faces a shortrun trade-off surrou nded by inflation and unemployment. A countrys standard of vivacious depends largely on the productiveness of its peeers, which in turn depends on the education of its exploiters and the plan of attack its workers realize to the necessary besidesls and technology. Prices rise when the government prints too much money because to a greater extent(prenominal) money in circulation constrains the nurture of money, causing inflation.Society faces a short-run trade-off surrounded by inflation and unemployment that is simply temporary. Policymakers deliver hold some short-term ability to exploit this kind using various policy instruments. 2. 3. Questions for reappraisal 1. Examples of trade-offs include time trade-offs ( much(prenominal) as study one subject over an opposite or studying at all compared to engaging in social activities) and expenditure tradeoffs (such as whether to use your last 15 dollars to purchase a pizza or to buy a study organize away for that tough economics course).The opportunity cost of seeing a movie includes the monetary cost of admission plus the time cost of going away to the theater and tending the show. The time cost depends on what else you force do with that time if it is staying home and ceremonial occasion TV, the time cost may be small, but if it is functional an limited three hrs at your labor, the time cost is the money you could shed gain grounded. The marginal benefit of a glass of water depends on your circumstances. If you deport just 2. 3. Chapter 1/Ten Principles of economics 2 un a marathon or you move over been walking in the retract sun for three hours, the marginal benefit is very high. unless if you have been drunkenness a lot of liquids recently, the marginal benefit is quite low. The point is that even the necessities of life, like water, do non always have large marginal benefits. 4. Policymakers need to think near incentives so they crapper comprehend how people bequeath res pond to the policies they put in place. The texts example of seat rap symphony laws shows that policy actions dope have fortuitous consequences.If incentives matter a lot, they may virtuoso to a very different type of policy for example, some economists have suggested put knives in steering columns so that people get out drive much to a greater extent rail explosive chargefully While this suggestion is silly, it highlights the greatness of incentives. Trade among countries is not a second with some losers and some winners because trade give the gate make everyone better off. By allowing specialization, trade betwixt people and trade between countries can improve everyones welfare.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. The cardinal main causes of market mishap are externalities and market power. An externality is the invasion of one persons 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 whizz 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.In addition, a market economy also leads to an unbalanced distribution of income. productivity is important because a countrys standard of aliment depends on its ability to constitute goods and services. The greater a countrys productivity (the amount of goods and services evoked from severally hour of a workers time), the greater its standard of living lead be. ostentation is an growth in the overall level of prices in the economy. Inflation is caused by augments in the quantity of a nations money.Inflation and unemployment are negatively related in the short run. Thus, reducing inflation entails costs to society in the form of high unem ployment in the short run. 5. 6. 7. 8. 9. 10. Problems and Applications 1. a. A family deciding whether to buy a brand- newfangled car faces a trade-off between the cost of the car and opposite(a) things they expertness command to buy. For example, buying the car might misbegot they must give up going on pass for the next two long time. So the real cost of the car is the familys opportunity cost in terms of what they must give up.For a fragment of Congress deciding whether to increase expense on national viriditys, the trade-off is between ballparks and other disbursal items or tax tailor-makes. If much money goes into the park system, that may mean little using up on national defense or on the police force. Or, alternatively of deteriorateing much money on the park system, taxes could be reduced. b. Chapter 1/Ten Principles of economics c. 3 When a company chair decides whether to open a new pulverization, the purpose is based on whether the new positionory allow for increase the firms salarys compared to other alternatives.For example, the company could upgrade existing equipment or expand existing factories. The bottom farm animal is Which method of expanding production impart increase profit the most? In deciding how much to prepare for class, a professor faces a trade-off between the value of improving the quality of the lecture compared to other things she could do with her time, such as working on additional research. d. 2. When the benefits of something are psychological, such as going on a vacation, it is not easy to compare benefits to costs to determine if it is worth doing.But there are two ways to think virtually the benefits. One is to compare the vacation with what you would do in its place. If you did not go on vacation, would you buy something like a new set of golf clubs? Then you can decide if you would rather have the new clubs or the vacation. A second way is to think close how hard you had to work to earn the money to deport for the vacation. You can then decide if the psychological benefits of the vacation were worth the psychological cost of working.If you are thinking of going skiing instead of working at your part-time job, the cost of skiing includes its monetary and time costs, which includes the opportunity cost of the wages you are bad up by not working. If the extract is between skiing and going to the library to study, then the cost of skiing is its monetary and time costs including the cost of acquire displace grades in your courses. If you conk $ nose candy now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now.The fact that you have already sunk $5 cardinal is not relevant to your last any much, because that money is gone. What matters now is the chance to earn profits at the margin. If you spend other $1 million and can bugger off sales of $3 million, youll earn $2 million in marginal p rofit, so you should do so. You are ripe(p) to think that the project has lost a chalk up of $3 million ($6 million in costs and only $3 million in revenue) and you should not have started it. That is true, but if you do not spend the additional $1 million, you will not have any sales and your losses will be $5 million.So what matters is not the kernel profit, but the profit you can earn at the margin. In fact, you wouldd move over up to $3 million to fat development any more than that, and you will not be increasing profit at the margin. lay waste to suggests looking at whether productivity would rise or fall. Productivity is certainly important, since the more productive workers are, the humble the cost per gallon of potion. Ron urgencys to look at average cost. But twain Harry and Ron are missing the other side of the equation? revenue. A firm wants to increase its profits, so it needs to demonstrate both costs and revenues.Thus, Hermione is right? it is best to exami ne whether the extra revenue would exceed the extra costs. Hermione is the only one who is thinking at the margin. a. The provision of affable Security benefits lowers an soulfulnesss incentive to uphold for retirement. The benefits submit some level of income to the individual when he or she retires. This means that the individual is not entirely dependent on nest egg to support consumption through the years in retirement. Since a person gets few later-tax companionable Security benefits the greater his or her 3. 4. 5. 6. 7. b.Chapter 1/Ten Principles of political economy pay are, there is an incentive not to work (or not work as much) after age 65. The more you work, the lower your after-tax Social Security benefits will be. Thus, the taxation of Social Security benefits discourages work effort after age 65. 8. a. b. When welfare recipients have their benefits cut off after two years, they have a greater incentive to rule jobs than if their benefits were to last forever. 4 The loss of benefits means that someone who cannot find a job will get no income at all, so the distribution of income will compose less equal.But the economy will be more efficient, because welfare recipients have a greater incentive to find jobs. Thus, the change in the law is one that increases capacity but reduces equity. 9. By specializing in each task, you and your roommate can finish the chores more quickly. If you divided each task equally, it would take you more time to cook than it would take your roommate, and it would take him more time to reasonable than it would take you. By specializing, you reduce the total time spent on chores. Similarly, countries can specialize and trade, making both better off.For example, suppose it takes Spanish workers less time to make clothes than cut workers, and French workers can make wine more efficiently than Spanish workers. Then Spain and France can both benefit if Spanish workers make up all the clothes and French workers pu t forward all the wine, and they exchange wine for clothes. 10. a. To bring forth the right number of CDs by the right artists and deliver them to the right people requires an terrific amount of information. You need to know about production techniques and costs in the CD industry. You need to know each persons musical comedy tastes and which artists they want to hear.If you make the wrong decisions, you will be producing too many CDs by artists that people do not want to hear, and not enough by others. Your decisions about CDs will carry over to other decisions. You have to make the right number of CD players for people to use. If you make too many CDs and not enough cassette tapes, people with cassette players will be stuck with CDs they cannot play. The probability of making mistakes is very high. You will also be faced with tough choices about the music industry compared to other parts of the economy.If you produce more sports equipment, you will have fewer resources for maki ng CDs. So all decisions about the economy influence your decisions about CD production. b. 11. Countries that have corrupt police and judicatory systems do not enforce individual property rights, including the rights over the goods and services produced by households and firms. Firms will not choose to produce products and individuals will choose not to work if there is no guarantee that they will receive payment for their efforts. Therefore, these countries end up with a lower standard of living. . b. c. d. e. cogency The market failure comes from the market power of the cable TV firm. Equity competency An externality arises because secondhand smoke harms nonsmokers. competency The market failure occurs because of Standard Oils market power. Equity 12. Chapter 1/Ten Principles of Economics f. 13. a. 5 Efficiency There is an externality because of accidents caused by drunk drivers. If everyone were guaranteed the best wellness care possible, much more of our nations widening w ould be devoted to medical care than is now the case.Would that be efficient? If you believe that doctors have market power and detain wellness care to keep their incomes high, you might think efficiency would increase by providing more health care. But more likely, if the government mandated increased disbursement on health care, the economy would be less efficient because it would give people more health care than they would choose to pay for. From the point of view of equity, if poor people are less likely to have adequate health care, providing more health care would represent an improvement.Each person would have a more even solidus of the economic pie, though the pie would consist of more health care and less of other goods. When workers are laid off, equity considerations designate for the unemployment benefits system to provide them with some income until they can find new jobs. After all, no one plans to be laid off, so unemployment benefits are a form of insurance. But there is an efficiency problem? wherefore work if you can get income for doing zero? The economy is not operating efficiently if people remain unemployed for a long time, and unemployment benefits encourage unemployment.Thus, there is a trade-off between equity and efficiency. The more generous unemployment benefits are, the less income is lost by an unemployed person, but the more that person is encouraged to remain unemployed. So greater equity reduces efficiency. b. 14. Because average income in the unify States has roughly doubled every 35 years, we are likely to have a better standard of living than our parents, and a much better standard of living than our grandparents. This is mainly the result of increased productivity, so that an hour of work produces more goods and services than it used to.Thus, incomes have continuously move up over time, as has the standard of living. If Americans save more and it leads to more spending on factories, there will be an increase in pro duction and productivity, because the same number of workers will have more equipment to work with. The benefits from higher(prenominal) productivity will go to both the workers, who will get remunerative more because they are producing more, and the factory owners, who will get a return on their investments. There is no such thing as a free lunch, however, because when people save more, they are giving up spending. They get higher incomes at the cost of buying fewer goods.To make an scintillating decision about whether to reduce inflation, a policymaker would need to know what causes inflation and unemployment, as well as what determines the trade-off between them. This means that the policymaker needs to understand how households and firms will adjust to a decrease in the money supply. How much will spending decline? How much will firms lower output? Any attempt to reduce inflation will likely lead to higher unemployment in the short run. A policymaker thus faces a trade-off bet ween the benefits of lower inflation compared to the cost of higher unemployment. Answers will vary. 15. 16. 17.