Solution Manual For
Economics, 11th edition John Sloman Dean Garratt Jon Guest
Chapter 1-26
Answers to in-text Questions in Economics (11th edition)
Chapter 1
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4 Give some other examples of choices that governments had to make during the pandemic. To what
extent were they economic choices?
The government had to decide how long to continue with its support and when to begin
withdrawing it and how quickly to do so. The choice of which businesses to force to close and
when to allow them to open up was another key decision. Another was what restrictions to impose
on foreign travel and when to open it up. Another was the amount of expenditure to allocate to
measures to tackle the virus, such as hospital expenditure on staff and equipment, track and trace,
and expenditure on vaccines. All of these were economic choices or had economic implications.
Governments also had to decide the order of priority for receiving vaccinations. Generally,
governments chose to do it in descending age order as older people were more likely to get
seriously ill from the virus. They also generally gave early access to the clinically vulnerable.
6 For what reasons may governments want other governments to stick to tough climate or emissions
targets and yet be not willing to so so themselves?
They want other governments to stick to tough climate change targets as everyone benefits,
including themselves, and yet the other countries bear the costs. They may not be willing to do so
themselves, however, as they would be bearing the costs and yet many of the benefits go to other
countries. This is a classic dilemma in economics – how to persuade people to bear the costs of
doing things that will benefit other people.
Could production and consumption take place without money? If you think they could, give
examples.
Yes. People could produce things for their own consumption. For example, people could grow
vegetables in their garden or allotment; they could do their own painting and decorating.
Alternatively people could engage in barter: they could produce things and then swap them for
goods that other people had produced.
Before reading on, how would you define scarcity? Must goods be at least temporarily
unattainable to be scarce?
See page 7 of text for a definition of scarcity. Goods need not be unattainable to be scarce.
Because people’s incomes are limited, they cannot have everything they want from shops, even
though the shops are stocked full. If all items in shops were free, the shelves would soon be
emptied!
7 Could each of these types of resources be increased in quantity or quality? Is there a time
dimension to your answer?
Yes. The working population could increase; more natural resources could be discovered or
extracted; more capital equipment could be produced through investment. The quality of labour
could increase through education and training; the quality of raw materials through cleaner
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extraction processes; the quality of capital through technological progress.
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7 If we would all like more money, why does the government not print a lot more? Could it not
thereby solve the problem of scarcity „at a stroke‟?
The problem of scarcity is one of a lack of production. Simply printing more money without
producing more goods and services will merely lead to inflation. To the extent that firms cannot
meet the extra demand (i.e. the extra consumer expenditure) by extra production, they will respond
by putting up their prices. Without extra production, consumers will end up unable to buy any
more than previously.
8 Which of the following are macroeconomic issues, which are microeconomic ones and which
could be either depending on the context?
(a) Inflation.
(b) Low wages in certain sectors.
(c) The rate of exchange between the pound and the euro.
(d) Why the prices of fresh fruit and vegetables fluctuate more than those of cars.
(e) The rate of economic growth this year compared with last year.
(f) The decline of traditional manufacturing industries.
(g) Immigration of workers
(a) Macro. It refers to a general rise in prices across the whole economy.
(b) Micro. It refers to specific industries
(c) Either. In a world context, it is a micro issue, since it refers to the price of one currency in
terms of one other. In a national context it is more of a macro issue, since it refers to the euro
exchange rate at which all UK goods are traded internationally. (This is certainly a less clear–
cut division that in (a) and (b) above.)
(d) Micro. It refers to specific products.
(e) Macro. It refers to the general growth in output of the economy as a whole.
(f) Micro (macro in certain contexts). It is micro because it refers to specific industries. It could,
however, also help to explain the macroeconomic phenomena of high unemployment or
balance of payments problems.
(g) Macro. It refers to an increase in labour generally rather than of a particular type.
10 (Threshold Concept 1) 1. Think of three things you did last week. What was opportunity cost of
each one?
Obviously, this depends on the three things you choose. In the case of things you purchased, the
opportunity cost is the next best thing you could have purchased with the money. In the case of
other activities, the opportunity cost is the next best thing you could have done with the time.
(Threshold Concept 1) 2. Assume that a supermarket has some fish that has reached its sell-by date.
It was originally priced at £10, but yesterday was marked down to £5 „for quick sale‟. It is now the
end of the day and it still has not been sold. The supermarket is about to close and there is no one in
the store that wants fish. What is the opportunity cost for the store of throwing the fish away?
It is simply the cost of disposing of it – which may be zero, if its waste disposal is not charged per
unit. The price it paid for the fish is irrelevant since it cannot recoup this cost.
11 Assume that you are looking for a job and are offered two. One is more enjoyable, but pays less.
How would you make a rational choice between the two jobs?
You should weigh up whether the extra pay (benefit) from the better paid job is worth the extra
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hardship (cost) involved in doing it.
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11 How would the principle of weighing up marginal costs and benefits apply to a worker deciding
how much overtime to work in a given week?
The worker would consider whether the extra pay (the marginal benefit) is worth the extra effort
and loss of leisure (the marginal cost).
14 Would it be desirable to have total equality in an economy, so that everyone receives the same
share of resources?
The objective of total equality may be regarded as desirable in itself by many people. There are
two problems with this objective, however.
The first is in defining equality. If there were total equality of incomes then households with
dependants would have a lower income per head than households where everyone was working. In
other words, equality of incomes would not mean equality in terms of standards of living. If, on the
other hand, equality were to be defined in terms of standards of living, then should the different
needs of different people be considered? Should people with special health or other needs have a
higher income? Also, if equality were to be defined in terms of standards of living, many people
would regard it as unfair that people should receive different incomes (according to the nature of
their household) for doing the same amount of work.
The second major problem concerns incentives. If all jobs were to be paid the same (or people
were to be paid according to the composition of their household), irrespective of people’s efforts or
skills, then what would be the incentive to train or to work harder?
16 1. What is the opportunity cost of the seventh million units of clothing?
3 million units of food. (Food production falls from 3 million units to zero.)
2. If the country moves upward along the curve and produces more food, does this also involve
increasing opportunity costs?
Yes. Ever-increasing amounts of clothing have to be sacrificed for each extra unit of food
produced.
3. Under what circumstances would the production possibility curve be (a) a straight line;
(b) bowed in toward the origin? Are these circumstances ever likely?
(a) When there are constant opportunity costs. This will occur when resources are equally suited
to producing either good. This might possibly occur in our highly simplified world of just two
goods. In the real world it is unlikely.
(b) When there are decreasing opportunity costs. This will occur when increased specialisation in
one good allows the country to become more efficient in its production. It gains ‘economies of
scale’ sufficient to offset having to use less suitable resources. We shall look at economies of
scale in Chapter 6, sections 6.3 and 6.4. Economies of scale are common in the real world.
Will economic growth always involve a parallel outward shift of the production possibility curve?
No. Technical progress, the discovery of raw materials, improved education and training, etc., may
favour one good rather than the other. In such cases the gap between the old and new curves would
be widest where they meet the axis of the good whose potential output had grown more.
19 How do you think the positions of these eight countries will change over the next decade?
Given that there is no clearly defined scale by which government intervention is measured, the
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precise position of the countries along the spectrum is open to question. However, it might be
reasonable to suppose that the countries at the left-hand side of the spectrum might continue to move
towards the centre/right. We have already seen this happening with China over the past decade.
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21 Try using the same type of analysis in the labour market to show what will happen if there is an
increase in demand for labour. What is the „price‟ of labour?
If there is an increase in demand, the price of labour will rise – which means that wage rates will
increase.
Can you think of any examples where prices and wages do not adjust very rapidly to a shortage or
surplus? For what reasons might they not do so?
Many prices set by companies are adjusted relatively infrequently: it would be administratively
too costly to change them every time there was a change in demand. For example a mail order
company, where all the items in its catalogue have a printed price, would find it costly to adjust
prices frequently, since that would involve printing a new catalogue, or at least a new price list.
Many wages are set annually by a process of collective bargaining. They are not adjusted in
the interim.
1. Why do the prices of fresh vegetables fall when they are in season? Could an individual farmer
prevent the price falling?
Because supply is at a high level. The increased supply creates a surplus which pushes down the
price. Individual farmers could not prevent the price falling. If they continued to charge the higher
price, consumers (wholesalers) would simply buy from those farmers charging the lower price.
2. If you were the manager of a supermarket, how would you set about deciding what prices to
charge for food approaching its sell-by date?
You would try to reduce the price of each item as little as was necessary to get rid of the remaining
stock. The problem for managers is that they do not have enough information about consumer
demand to make precise calculations here. Many managers try a fairly cautious approach first,
lowering the prices a modest amount as the sell-by date approaches, and then, if that is not enough
to sell all the items, making further reductions towards the end of the sell-by day.
3. Demand for downloaded music has grown rapidly, yet the prices of downloads have fallen.
Why?
Competition from increased numbers of sites offering downloads has increased supply and
driven prices down.
Technology has become widely available and has fallen in price, reducing the cost of offering
downloads.
23 Summarise this last paragraph using symbols like those in Figure 1.7.
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