Essentials of Economics,8th (2011) ed., by Schiller, Bradley R., solutions manual and test bank

Schiller, Bradley R., Essentials of Economics,8th (2011) ed., solutions manual and test bank for 0073511390
Essentials of Economics,8th (2011) ed.,  by Schiller, Bradley R.,  solutions manual and test bank for 0073511390
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 solutions manual

 

THE U.S. ECONOMY

 

PROBLEMS

1.    Draw a production-possibilities curve with consumer goods on one axis and investment goods on the other axis.

                       (a)       Identify the opportunity cost of increasing investment from I₁ to I₂.

(b)  What will happen to future production possibilities if investment increases?  Illustrate.

(c)  What will happen to future production possibilities if only consumer goods are produced?

LO: 1              AACSB: Analytic                          BT: Apply

 

(a)    The opportunity cost of increased investment is a decrease in production of consumer goods. For example, see the movement from point D to point E.

(b)    If investments increase, the production possibilities curve will shift outward.  This occurs because the capital stock, a factor of production, increases with increases in investment.

(c)     If only consumer goods are produced, the capital stock will begin to decline as factories and equipment wear out.  As a result, the production possibilities curve will shift in toward the origin.

2.    Suppose the following data describe output in two different years.

Item	Year 1	Year 2
Apples Bicycles Movie Rentals	20,000 @ 25¢ each 700 @ $800 each 6,000@ $1.00 each	30,000 @ 30¢ each 650 @ $900 each 8,000 @ $1.50 each

(a)  Compute nominal GDP in each year.

(b)  By what percentage did nominal GDP increase between Year 1 and Year 2?

(c)  Now compute real GDP in Year 2 by using the prices of Year 1.

(d)  How has real GDP changed from Year 1 to Year 2?

LO: 1              AACSB: Analytic                          BT: Apply

        (a)                        GDP Figures

                                   Year 1

                  Apples                      20,000 x $.25 = $    5,000

                              Bicycles                             700 x $800     =         $560,000

                  Movie Rentals               6,000 x $1.00   =     $    6,000

GDP                                              $571,000

                                   Year 2

                  Apples                      30,000 x $.30 = $      9,000

Bicycles                             650 x $900     =  $ 585,000

                  Movie Rentals               8,000 x $1.50      =       $   12,000

                  GDP                                                                $606,000

(b)  From year 1 to year 2 GDP increased by $35,000.  This is a 6.1% increase over the $571,000 figure for year 1.   The calculations for this number are: 

35,000 / 571,000 * 100 = 6.1%

(c)                Real GDP Year 2

                  Apples                      30,000 x $.25 =   $    7,500

                              Computers                       650 x $800     =         $520,000

                  Movie Rentals               8,000 x $1.00   =     $    8,000

                  GDP                                                            $535,500

(d)  Real GDP in year 1 is $571,000.  In year 2 it is $535,500.  This is a decrease of $35,500.  That represents a decline of 6.2% in real GDP.  The calculations for this number are:  -35,500 / 571,000 * 100 = -6.2%

3.    GDP per capita in the United States was approximately $49,000 in 2009.  What will it be in the year 2015 if GDP per capita grows each year by

(a)  0 percent?

(b)  2 percent?

LO:1        AACSB: Analytic                          BT: Apply

              

(a)    $49,000

(b)    $55,181.96 which is $49,000 × (1.02)⁶.

Alternatively,

Year	Growth from previous year	GDP per capita
2009		$49,000
2010	1.02 × $49,000	$49,980
2011	1.02 × $49,980	$50,979.60
2012	1.02 × $50,979.60	$51,999.19
2013	1.02 × $51,999.19	$53,039.18
2014	1.02 × $53,039.18	$54,099.96
2015	1.02 × $54,099.96	$55,181.96

4.   According to Figure 2.4,

(a)  Has the quantity of manufactured output increased or decreased since 1900?

(b)  By how much (in percentage terms)?

(c)  Why has the manufacturing share of GDP fallen?

LO: 4              AACSB: Analytic                          BT: Apply

(a) In 1900, manufacturing output accounted for 22% of total output. In 2000, manufacturing output accounted for 20% of total output. However, total output has grown thirteen-fold over this time, which implies that 22% of GDP₁₉₀₀ < 20% of GDP_2000. The quantity of manufacturing output has grown.

(b) 1,082%

(c) The share of manufacturing has fallen because manufacturing has not grown as quickly as GDP (total output) has grown. Alternatively, the service sector and government sectors have grown more quickly over time.

5.   Assume that total output is determined by the formula:

        

number of workers × productivity = total output (output per worker)

        

(a) If productivity doesn’t improve, how fast can output increase?

(b) If productivity increases by 2 percent and the number of workers increases by 1 percent a year, how fast will output grow?

LO: 1,3           AACSB: Analytic                          BT: Apply

(a) Total output can only increase at the same rate as the population (of workers) increases.  If the population of workers increases by 1%, then total output will increase by 1% as well.

(b) Output will grow by (1.01) × (1.02) – 1 = 0.0302 or 3.02%. Students can also approximate the correct answer simply by adding the growth rate of the population to the growth rate of productivity, because the percentages are both very small.

6.    According to Table 2.4,

(a) What is the average income in the United States?

(b) What percent of the income of people in the highest fifth would have to be taxed away to achieve that average?

LO: 5              AACSB: Analytic                          BT: Apply

(a) According to the data in Table 2.4, the average is $68,424.

(b) In order to reduce their income from $171,057 to $68,424, the highest fifth would have to have $171,057 – $68,424 = $102,633 of their income taxed away. This represents $102,633 / $171,057 = 60% of the average income for this income bracket.

7. According to the Headline on p. 46, what percent of their income would the highest-decile households in Namibia have to give up to end up with an average income?

LO: 5              AACSB: Analytic                          BT: Apply

There are many ways to calculate the right answer, but this way may make the most sense for students: Suppose the country of Namibia had 10 citizens, so that each represented one decile of the population. If the average income is $7,910, then the total for all ten citizens is $79,100. The richest one person is currently earning 64.5% of that total, which is 0.645 × $79,100 = $51,019.50. In order to reduce this person’s income to the average, $51,019.50 – $7,910 = $43,109.50 would have to be taxed away. This represents $43,109.50 / $51,019.50 = 0.845 = 84.5% of the income of the richest decile.

8.    Suppose that the following table describes the spending behavior of individuals at various income levels:

Income	Total Spending	Sales Tax	Sales Tax Paid As Percentage of Income
$10,000	$12,000
20,000	18,000
50,000	40,000
100,000	70,000

If a sales tax of 10 percent is levied on all purchases, calculate

(a)   The amount of sales tax paid at each income level.

(b)  The fraction of income paid in taxes at each income level. 

Is the sales tax progressive or regressive in relation to income?