Essentials
of Economics by Schiller, Bradley 9th editions
solutions manual and test bank
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http://www.mediafire.com/view/smznjtt861w3ych/Essentials_of_Economics_9e_Bradley_Schiller_Cynthia_Hill.ch2.docx
Book Description
September 20, 2013 0078021731 978-0078021732 9
ANSWERS
TO QUESTIONS FOR DISCUSSION AND PROBLEMS
QUESTIONS FOR
DISCUSSION
LO: 2 AACSB: Ethics BT:
Create
The
reality of human nature is that needs are culturally conditioned. There is never enough. Just to maintain living standards as
population grows will require more output.
2. Why do we measure output in value terms
rather than in physical terms? For that
matter why do we bother to measure output at all?
LO: 1 AACSB: Analytic BT:
Analyze
Our
economy produces thousands of different items, ranging from paper clips to
sophisticated electronic equipment. Value estimates are a common denominator
for measuring all of these different things.
In addition, in our complex and decentralized market economy, it is
impossible to account for every item of output produced. Sales records are more available for
estimates of value than are output numbers across the economy. Measures of output provide benchmarks that
show if growth is occurring and at what rate.
3. Why do people suggest that the United States
LO: 3 AACSB: Reflective Thinking BT:
Analyze
Investment
goods are capital goods such as machines and factories that help us produce
more output. If we concentrated on only
consumption goods, we would be unable to replace our machines as they wore out
or to expand our productive capacity by producing more, and more efficient,
machines.
4. The U.S.
LO: 4 AACSB: Analytic BT:
Analyze
They
went to the cities to become factory workers and service workers because there
were jobs available for them in those sectors of the economy. There were fewer and fewer jobs in the
agricultural sector because of the advances of technology in that sector.
5. Rich people have over 15 times as much income
as poor people. Is that fair? How should output be distributed?
LO: 5 AACSB: Ethics BT:
Create
Fair
is generally considered to be a relative term.
On an individual basis, many would consider it ‘fair’ if they personally
received more or if someone else received less.
In a market economy, the distribution of output (and therefore income)
is determined primarily by the laws of supply and demand. This often results in an unequal
distribution. However, in order to make sure that the distribution is not so
unequal that we have people literally starving to death in the streets, the
government steps in and lessens the degree of inequality through various
programs and tax policies. Thus, at some point, fairness does become less
subjective and more objective when the inequality causes lives being put at
risk, which, once recognized, results in a redistribution of income.
6. If taxes
were more progressive, would total output be affected?
LO: 5 AACSB: Analytic BT:
Analyze
Taxes
create a disincentive to engage in any activity that is being taxed. If taxes were more progressive, people who
face the higher taxes would have less incentive to work. As a result, total output would decline.
7. Why might
income inequalities diminish as an economy develops?
LO: 5 AACSB: Analytic BT:
Analyze
As
an economy develops, more jobs become available and thus more people will work
and earn incomes. There will also be
more capital available and therefore labor productivity – and income of workers
– will rise. Although incomes will not
likely be equalized, on average there should be, and generally is, less income
disparity.
8. Why is per capita GDP so much higher in the United States than in Mexico
LO: 3 AACSB: Analytic BT:
Analyze
Per
capita GDP in the U.S. was $49,000 in 2012, almost five times the world
average, and more than three times Mexico’s per capita GDP. Thus, the average
U.S. worker produces about three times as much, when measured in dollars, as
the average Mexican worker. This is largely caused by the higher productivity
capabilities of the U.S.
9. Do we need
more or less government intervention to decide WHAT, HOW, and FOR WHOM? Give specific examples.
LO: 4 AACSB: Reflective Thinking BT:
Create
It
really depends on the type of goods and services society would like to see
provided. Some products such as clean
water and clean air are not usually provided well by private markets and more
government intervention might be desired.
Other products such as computers, food, etc., are usually best provided
by markets and less government intervention might be desired.
10. POLICY PERSPECTIVES What can poor nations do to raise their
living standards?
LO: 3 AACSB: Reflective Thinking BT:
Create
This
is a complicated issue. A few of the things that poor nations can do to raise
their living standards include increasing their investment/consumption ratio,
investing in human capital, and reducing illiteracy. Many believe that poor
nations will need the assistance of the rich nations of the world to achieve
this goal.
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 now?
(c) What will happen
to future production possibilities if only consumer goods are produced now?
Answers:
(a)
the reduced consumer goods of C1 to
C2
(b)
production possibilities will increase, shifting the ppc to the right
(c)
production possibilities will decrease, shifting the ppc to the left
Explanation:
(a) The opportunity cost of
increasing investment is the loss of consumer goods. Specifically, when investment increases from
I1 to I2 consumption goods decrease from C1 to
C2.
(b) Investment goods include the
plant, machinery, and equipment that are produced for use in the business
sector. If investment increases it will
improve our stock of capital, and will expand our production possibilities,
shifting our curve to the right.
(c) Consumer goods include
everything consumers buy. If only
consumer goods are produced, equipment and factories (for example) will not be
replaced and production possibilities will diminish leading to a shift to the
left in the curve.
LO 02-01
Topic: What America Produces
AACSB: Analytic
Blooms: Level 4 Analyze
2. Suppose the following data describe output in
two different years:
Item Year
1 Year 2
Apples 20,000
@ $0.25 each 30,000 @ $0.30 each
Bicycles 700
@ $800 each 650 @ $900 each
Movie rentals 10,000 @ $1.00 each 12,000
@ $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)
By what percentage did real GDP increase between Year 1 and Year 2?
Answers:
(a) Year 1 = $575,000 Year 2 = $612,000
(b) 6%
(c) $539,000
(d) 6%
Explanation:
(a) Nominal GDP is the
value of output measured in current prices.
In Year 1 nominal GDP is $575,000 (= (20,000 x $0.25) + (700 x $800) +
(10,000 x $1.00)). In Year 2 nominal GDP
is $612,000 (= (30,000 x $0.30) + (650 x $900) + (12,000 x $1.50)).
(b) Nominal GDP
increased from $575,000 to $612,000, or 6% (= ($612,000 - $575,000) /
$575,000).
(c) Real GDP is the
value of output measured in constant prices, or in this case the prices of Year
1. Real GDP in Year 2 is $539,500 (=
(30,000 x $0.25) + (650 x $800) + (12,000 x $1.00)).
(d) Real GDP decreased
from $575,000 in Year 1 to $539,500 in Year 2, this is a decrease of 6% (=
($539,500 - $575,000) / $575,000).
LO 02-01
Topic: What America Produces
AACSB: Analytic
Blooms: Level 4 Analyze
3. GDP per capita in the United States was
approximately $50,000 in 2013. What will
it be in the year 2016 if GDP per capita grows each year by
(a) 0 percent?
(b) 2 percent?
Answers:
(a) $50,000
(b) $54,122
Explanation:
(a) GDP per capita
will remain the same over time if the GDP per capita growth rate is 0%.
(b) GDP per capita
will increase to $54,122. GDP per capita
will grow four years and can be determined by using the growth function GDP per
capita = $50,000 (1.02)4.
LO 03-01
Topic: What America Produces
AACSB: Analytic
Blooms: Level 3 Apply
4. According to Figure 2.4
(a) Did the quantity of manufactured
output increase or decrease between 1900 and 2000?
(b) By how much (in percentage terms)?
(c) Did the manufacturing share of GDP
rise or fall during this time?
Answers:
(a) increase
(b) 1082%
(c) fall
Explanation:
(a) Technological
advances have made it possible to increase manufacturing output tremendously.
According to the figure, in the twentieth century the total output of the U.S.
economy increased thirteenfold while the percentage of the total output
decreased from 22% to 20%. Clearly
quantity of manufactured output increased.
(b) In 1900 manufacturing
was 22% of the total output (total output was 100). In 2000 manufacturing was 20% of a total
output that had increased thirteen times (an output base of 1300). Manufacturing increased from 22 (= 0.22 x
100) to 260 (= 0.20 x 1300) or 1082% (= (260 – 22) / 22).
(c) According to the
figure, the share fell from 22% to 20% if total output over the last 100 years.
LO 02-04
Topic:
The Mix of Output
AACSB:
Analytic
Blooms: Level 4
Analyze
5. Assume that total output is determined by the
formula:
number of workers x
productivity = total output
(output per worker)
(a) If the workforce is growing by 1
percent a year but productivity doesn’t improve, how fast can output increase?
(b) If productivity increases by 3 percent
and the number of workers increases by 1 percent a year, how fast will output
grow?
Answer:
(a) 1
percent
(b) 4
percent
Explanation:
(a) If the workforce
is growing by 1% (number of workers = 1.01) and productivity isn’t changing
(productivity = 1) total output is increasing by 1% (= 1.01 x 1).
(b) If productivity is
increasing by 3% (productivity = 1.03) and the number of workers increases by
1% (number of workers = 1.01) total output will grow by 4% (= 1.03 x 1.01).
LO 02-03
Topic:
How America Produces
AACSB:
Analytic
Blooms: Level 3 Apply
6. According to the News Wire on p. 38 by what
percentage did productivity increase at Boeing between 1995 and 2010?
Answer:
45.5%
Explanation:
According to the
article, the number of days to build a 737 airliner fell from 22 days to 12
days, a productivity increase of 45.5% (= 10/22).
LO 02-03
Topic:
How America Produces
AACSB:
Analytic
Blooms: Level 2
Understand
7. According to Table 2.4,
(a) What is the average income in the
United States?
(b) What percentage of the income of people
in the highest fifth would have to be taxed away to bring them down to that
average?
Answer:
(a)
$69,677
(b) 61%
Explanation:
(a) The average income
in the U.S. is $69,677(= ($178,020 + 80,080 + 49,842 + 29,204 + 11,239) / 5).
(b) The highest fifth
of the U.S. population earn $178,020 on average. They would need to lose $108,343 in order to
bring them down to the average of $69,677.
This is a 61% loss (= $108,343 / $178,020).
LO 02-05
Topic:
For Whom America Produces
AACSB:
Analytic
Blooms: Level 3 Apply
8. According
to the News Wire on p. 46, what percentage of their income would the
highest-decile households in Namibia have to give up to end up with an average
income?
Answer:
54.5%
Explanation:
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
$79,000. The richest one person is currently
earning 64.5% of that total, which is 0.645 x $79,100 - $51,019.50. In order to reduce this person’s income to
the average, $43,109.50 (= $51,019.59 - $7,910) would have to be taxed
away. This represents 84.5% (=
$43,109.50 / $51,019.50) of the income of the richest decile.
LO 02-05
Topic:
For Whom America Produces
AACSB:
Analytic
Blooms: Level 5
Evaluate
9. Complete the following table:
Before Tax Tax Rate Tax
Paid After Tax
Income Income
Rich Family $500,000 30% $150,000 $350,000
Middle-class Family $ 50,000 20% $ 10,000 $ 40,000
Poor Family $
20,000 2% $ 400 $ 19,600
What is the ratio of a rich family’s income
to a poor family’s income?
(a) Before taxes?
(b) After taxes?
(c) Is this tax progressive?
Answers:
(a) 25:1
(b) 18:1
(c) yes
Explanation:
(a) The before tax
ratio of a rich family to a poor family is 25:1 (= $500,000 / $20,000).
(b) The after tax
ratio of a rich family to a poor family is 18:1 (= $350,000 / 19,600).
(c) A tax system in
which tax rates rise as incomes rise is a progressive tax system. In this example higher incomes are taxed at a
higher rate.
LO 02-05
Topic:
For Whom America Produces
AACSB:
Analytic
Blooms: Level 3 Apply
10. The United States devotes 0.2 percent of its
GDP to development assistance.
(a) How much money is that? (See Figure
2.1.)
(b) If the aid share doubled, how much more
(than the value determined in part (a)) would that be for each of the 3 billion
“extremely poor” people in developing nations?
Answers:
(a)
$0.03 trillion
(b) $10
Explanation:
(a) According to the
figure the U.S. has a GDP of $15.20 trillion which implies development
assistance of $0.03 trillion (= $15.20 trillion x 0.002).
(b) If the aid share
doubled, development assistance would increase by an additional $0.03 trillion
(= $15.20 trillion x 0.002). This is
approximately $10 for each of the 3 billion “extremely poor” people in the
developing nations.
LO 02-02
Topic:
What America Produces
AACSB:
Analytic
Blooms: Level 2
Understand
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