Principles of Microeconomics
09th Canadian Edition Gregory Mankiw, Kneebone, McKenzie
Table of Contents:-
Chapter 1. Ten Principles of Economics.
Chapter 2. Thinking Like an Economist.
Chapter 3. Interdependence and the Gains from Trade.
Chapter 4. The Market Forces of Supply and Demand.
Chapter 5. Elasticity and Its Application.
Chapter 6. Supply, Demand, and Government Policies.
Chapter 7. Consumers, Producers, and the Efficiency of Markets.
Chapter 8. Application: The Costs of Taxation.
Chapter 9. Application: International Trade.
Chapter 10. Externalities.
Chapter 11. Public Goods and Common Resources.
Chapter 12. The Design of the Tax System.
Chapter 13. The Costs of Production.
Chapter 14. Firms in Competitive Markets.
Chapter 15. Monopoly.
Chapter 16. Monopolistic Competition.
Chapter 17. Oligopoly.
Chapter 18. The Markets for the Factors of Production.
Chapter 19. Earnings and Discrimination.
Chapter 20. Income Inequality and Poverty.
Chapter 21. The Theory of Consumer Choice.
Chapter 22. Frontiers of Microeconomics.
,Chapter No. 1: Ten Principles of Economics
SOLUTIONS TO TEXTBOOK PROBLEMS
Questions for Review
1. What is a tradeoff? Give two examples of tradeoffs that you face in your life.
A tradeoff is what you give up in order to get something else. Examples of
tradeoffs include time tradeoffs (such as studying one subject over another, or studying at all
compared to engaging in social activities), and spending tradeoffs (such as whether to use your
last $15 to purchase a pizza or to buy an online study guide for that tough economics course).
2. What is the opportunity cost of seeing a movie?
The opportunity cost of seeing a movie includes the monetary cost of admission
plus the time cost of going to the theatre and attending the show. The time cost depends on
what else you might do with that time; if it’s staying home and watching TV, the time cost may
be small, but if it’s working an extra three hours at your job, the time cost is the money you
could have earned.
3. Water is necessary for life. Is the marginal benefit of a glass of water
large or small?
The marginal benefit of a glass of water depends on your circumstances. If
you’ve just run a marathon, or you’ve been walking in the desert sun for three hours, the
marginal benefit is very high. But if you’ve been drinking a lot of liquids recently, the marginal
benefit is quite low. The point is that even the necessities of life, like water, don’t always have
large marginal benefits.
4. Why should policymakers think about incentives?
Policymakers need to think about incentives so they can understand how people
will respond to the policies they put in place. The text’s examples of seat belts and crosswalk
countdown signals show that policy actions can have quite unintended consequences. If
incentives matter a lot, they may lead to a very different type of policy; for example, some
economists have suggested putting knives in steering columns so that people will drive much
more carefully! While this suggestion is silly, it highlights the importance of incentives.
5. Why isn’t trade among countries like a game, with some winners and some
losers?
Trade among countries isn’t a game with some losers and some winners because
trade can make everyone better off. By allowing specialization, trade between people and trade
between countries can improve everyone’s welfare.
,6. What does the “invisible hand” of the marketplace do?
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.
7. Explain the two main causes of market failure and give an example of each.
The two main causes of market failure are externalities and market power. An
externality is the impact of one person’s 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 single 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.
8. Why is productivity important?
Productivity is important because a country’s standard of living depends on its
ability to produce goods and services. The greater a country’s productivity (the amount of goods
and services produced from each hour of a worker’s time), the greater will be its standard of
living.
9. What is inflation, and what causes it?
Inflation is an increase in the overall level of prices in the economy. Inflation is
caused by increases in the quantity of a nation’s money.
10. How are inflation and unemployment related in the short run?
Inflation and unemployment are negatively related in the short run. Reducing
inflation entails costs to society in the form of higher unemployment in the short run.
Problems and Applications
1. Describe some of the tradeoffs faced by each of the following.
a. a family deciding whether to buy a new car
b. a member of Parliament deciding how much to spend on national parks
c. a company president deciding whether to open a new factory
d. a professor deciding how much to prepare for class
a. A family deciding whether to buy a new car faces a tradeoff between the
cost of the car and other things they might want to buy. For example, buying the car might mean
they must give up going on vacation for the next two years. So the real cost of the car is the
family’s opportunity cost in terms of what they must give up.
b. For a member of Parliament deciding whether to increase spending on national parks,
the tradeoff is between parks and other spending items or tax cuts. If more money goes into the
park system, that may mean less spending on national defence or on the police force. Or, instead
of spending more money on the park system, taxes could be reduced.
c. When a company president decides whether to open a new factory, the decision is based
on whether the new factory will increase the firm’s profits compared to other alternatives. For
, example, the company could upgrade existing equipment or expand existing factories. The
bottom line is: Which method of expanding production will increase profit the most?
d. In deciding how much to prepare for class, a professor faces a tradeoff 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.
2. You are trying to decide whether to take a vacation. Most of the costs of the
vacation (airfare, hotel, forgone wages) are measured in dollars, but the benefits of the vacation
are psychological. How can you compare the benefits to the costs?
When the benefits of something are psychological, such as going on a vacation,
it isn’t easy to compare benefits to costs to determine if it’s worth doing. But there are two ways
to think about the benefits. One is to compare the vacation with what you would do in its place.
If you didn’t go on vacation, would you buy something like a new set of golf clubs? Then you can
decide if you’d rather have the new clubs or the vacation. A second way is to think about how
much work you had to do to earn the money to pay for the vacation; then you can decide if the
psychological benefits of the vacation are worth the psychological costs incurred to earn the
money to pay for the vacation.
3. You were planning to spend Saturday working at your part-time job, but a friend
asks you to go skiing. What is the true cost of going skiing? Now suppose that you had been
planning to spend the day studying at the library. What is the cost of going skiing in this case?
Explain.
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, including the opportunity cost of the wages
you are giving up by not working. If the choice is between skiing and going to the library to
study, then the cost of skiing is its monetary and time costs, including the cost to you of getting
a lower grade in your course.
4. You win $100 in a hockey pool. You have a choice between spending the money
now or putting it away for a year in a bank account that pays 5 percent interest. What is the
opportunity cost of spending the $100 now?
If you spend $100 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 idea that money
has a time value is the basis for the field of finance, the subfield of economics that has to do with
prices of financial instruments like stocks and bonds.
5. The company that you manage has invested $5 million in developing a new
product, but the development is not quite finished. At a recent meeting, your salespeople report
that the introduction of competing products has reduced the expected sales of your new product
to
$3 million. If it would cost $1 million to finish development and make the product, should you go
ahead and do so? What is the most that you should pay to complete development?
The fact that you’ve already sunk $5 million isn’t relevant to your decision
anymore, since that money is gone. What matters now is the chance to earn profits at the
margin. If you spend another $1 million and can generate sales of $3 million, you’ll earn $2
million in marginal profit, so you should do so. You’re right to think that the project has lost a
total of $3 million ($6 million in costs and only $3 million in revenue), and you shouldn’t have
started it. That’s true, but if you don’t spend the additional $1 million, you won’t have any sales
and your losses will be $5 million. So what matters is not the total profit, but the profit you can
