© McGraw Hill 202 4 Sayre/Morris, Principles of Macroeconomics 11th edition 5-1 Solution Manual For Principles of Macroeconomics 11CE John Sayre, Alan Morris Chapter 1-13 CHAPTER ONE The Economic Problem Overview Comments In Chapter One, we decided to begin by giving students an idea of how diverse and how engaged our discipline is by looking at a number of current controversies. This, we hope helps to correct the perception that many students have of economics as being a dry and theoretical subject with little relevance to the real world. We then focus on what is, arguably, the most important idea in economics: that scarcity force s choice and choice involve s the concept of opportu nity cost. We look at the three fundamental questions in economics and four methods of co -ordinating an economy and we have found that students react well to a discussion of both of these topics. Perhaps we should remind ourselves that introductory chapters are probably the only oppor tunity for us to encourage students to look beyond the market structure and realize that it is only one of various possible ways for society to organize its economic affairs. We discuss the fact that the discipline‘s methodology is, by necessity, abstract, since this is the only way one can deal with such a broad range of topics. The discussion of the use of abstract methodology leads naturally into a discussion of the role of models in economics. We then look at our first model in economics, production possibilities, and show how illuminating this idea can be since it allows us to illustrate some of the basic, but vital topics in economics: choice, cost, economic growth, technological improvement and the immense importance of investment. Starting with 1st edition , we have felt that a first chapter in M acroeconomics should discuss economic goals. Doing so illustrates the importance of relating economic theory to the policy decisions that governments have to make. In addition, we wanted to ensure that students had immediate exposure to the most important macro terms such as economic growth, unemployment, and inflation. We present several tables and figures, using the most re cent data available, in order to give students some idea of how the Canadian economy has performed in recent years. Suggested Approaches and Helpful Hints As a starting point in a new course, it may be useful for you to walk students through the Study Guide (as well as the Test your Understanding questions in the body of each chapter) and explain that answers can be found in the Student Solutions Manual . Answers to all questions, including Problems for Further Study , are found below . © McGraw Hill 202 4 Sayre/Morris, Principles of Macroeconomics 11th edition 5-2 Many years of teaching the Principles of Microeconomics has convinced both of your authors that the vast majority of students can get a good grade in this supposedly tough course if they do all of the questions in the Study Guide. For some, this will, at first, take a lot of time but inevitably they will get faster and faster at answering questions as the term progresses and this will do wonders for their self -confidence. It is our experience that if we spend enough time on production possibilities, we can illustrate six distinct aspects of economics: the necessity of choice, economic growth, unemployment, efficiency, technological change and opportunity cost. This makes produc tion possibilities a powerful model and, more importantly, demonstrates what we mean by the word model. Given the huge role that models play in economic theory, understanding exactly what a model is can be an important step for any student. In presenting this introductory chapter, we have also found it instructive to find out just how much students are aware of how well or badly Canada has fared in recent years in achieving its economics goals. It‘s interesting to hear their estimates of the present rates of unemployment, inflation etc. The wide range of answers can be astonishing! Answers to Test Your Understanding Questions 1. a) P b) N c) N d) P 2. a) Mi b) Ma c) Mi d) Ma 3. a) K b) C c) K d) C e) B f) K 4. a) K b) N c) N d) L e) E f) K 5. a) 400 guns b) 100 guns. (This means going from combination b to combination c. As a result, \ the number of guns would drop from 400 to 300) © McGraw Hill 202 4 Sayre/Morris, Principles of Macroeconomics 11th edition 5-3 c) greater (since it costs 150 guns going from c to d compared to only 100 guns from b to c) 6. a) and b) See the following figure: c) 25 units of grain (old combination C would now be 25 grain and 12 tools) Answers to It’s News to Me I. d) (Any activity that uses resources has an opportunity cost and is therefore not free) II. c) (One could argue that taking a deep breathe on a remote mountain top is free) III. b) (This is the answer that reveals the concept of opportunity costs, i.e., what other uses those resources could have been used for) Answers to Study Problems 1. a) 20 tea is gained at a cost of 10 coffee. (Point u means 0 tea and 120 coffees; point v is 20 tea and 110 coffees) b) 20 tea is gained at a cost of 30 coffee (Point w means 35 tea and 100 coffees; point x is 55 tea and 70 coffees) c) 5 tea is gained at a cost of 30 coffee (Point y means 65 tea and 30 coffees; point z is7 0 tea and 0 coffee s) 2. a) 10 beef (half-way between D and E) b) 70 rice (half- way between B and C) c) no (100 rice is between C and D but that means production of beef is between 20 and 35) d) yes (combination C is 90 rice and 35 beef so it can certainly produce less than this) 3. a) 15 units of beef (This means going from combination A to combination C, where beef drops from 50 to 35) b) 15 units of beef. (The increase in rice from 90 to 120 causes beef to drop from 35 to 20) © McGraw Hill 202 4 Sayre/Morris, Principles of Macroeconomics 11th edition 5-4 c) ½ unit of beef. (30 more rice costs 15 beef; therefore 1 more rice costs 15/30 beef) d) 30 units of rice (The increase in beef from 20 to 35 causes rice to drop from 120 to 90) 4. a) See the following table: Table 1.9 (Completed) Possibility A B C D E F Cheese 0 30 50 65 75 80 Wine 110 105 95 70 40 0 b) No (If it produced 65 cheese – combination D – the maximum wine would be 70) c) 30 wine ( This would mean going from combination D to E. Production of wine would drop from 70 to 40, a difference of 30) d) 15 cheese ( This would mean going from combination D to C. Production of cheese would drop from 65 to 50, a difference of 15) 5. a) 40 wheat (This is half -way between combinations C and D. Half -way between 35 and 45 wheat is 40 wheat) b) 4 cars (This means going from combination C to D. Car production would drop from 18 to 14, a difference of 4) c) 2 ½ wheat (This means going from combinatio n D to C. 4 more cars would cost 10 wheat; so 1 car would cost 10/4 or 2 ½ wheat) 6. a) See the following table: Table 1.1 2 (Completed) A B C D E F Balls 0 150 250 325 375 400 Bats 55 52 46 36 20 0 b) 100 balls (Going from combination C to combination B, ball production drops from 250 to 150) . c) No. (The closest is combination C at 250 balls and 46 bats) . d) See the following table: Table 1.1 2 (Completed) A B C D E F Balls 0 150 250 325 375 400 Bats 55 52 46 36 20 0 Bats 2 80 72 61 46 25 0 (Bat production increases by ½ unit per worker – this is not a 50% increase in production!) e) Yes. This is shown in the revised production possibilities table: New combination C gives exactly 250 balls and 61 bats. 7. a) 0.75 trucks (12/16) b) 1.75 trucks (14/8) c) 1.33 kiwis (16/12) d) 0.57 kiwis (8/14) e) 12 kiwis and 13 trucks (8 kiwis and 6 trucks in Kitchener and 4 kiwis and 7 trucks in Waterloo) .
