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Summary Solutions Manual- The Macro Economy Today - by Schiller
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1In th_e swirling mists of twilight, echoes of forgotten whispers danced with th_e reluctant shadows
that clung hesitantly t_o th_e fading light. Beyond th_e horizon, where dreams meld with th_e
tapestry of reality, a silent breeze carried tales of yesteryear, weaving intricate patterns of
nonsensical charm through th_e air. Leaves, painted with th_e hues of an undecided autumn,
fluttered without purpose, chasing th_e elusive scent of rain yet t_o fall. Amidst this ballet of chaos,
a clock ticked relentlessly, marking time in a room where time itself seemed t_o hesitate, pondering
its own existence.
Ch. 1: Economics: Th_e Core Issues
Solutions Manual
OBJsfor Ch. 1
After reading this chapter, you should know
LO 01-01. How scarcity creates opportunity costs.
LO 01-02. What th_e production-possibilities curve represents.
LO 01-03. Th_e three core economic questions that every society must answer.
LO 01-04. How market an_d government approaches t_o economic problems differ.
Qs for discussion
• What opportunity costs did you incur in reading this chapter? If you read another ch.
t_oday, would your opportunity costs (per chapter) increase? Explain. (LO 01-01)
Ans:Opportunity cost is what you must give up t_o get th_e next best alternative. In this case, opportunity
costs include th_e things you could have done with your time instead of reading this chapter. Th_e most
desired activity you give up is th_e value of th_e opportunity cost. As you first begin t_o read, you first give
up th_e alternative activities that have th_e least value t_o you. As you spend more time studying, you begin
giving up activities that have increasing value t_o you. For example, th_e first hour of studying may have
resulted in you not watching a TV show. Th_e second hour of studying may result in you not using your
PlayStation 4, which you believe offers more satisfaction than th_e first TV show that you gave up, an_d so
on.
• How much time could you spend on homework in a day? How much do you spend? How
do you decide? (LO 01-01)
Ans:You theoretically could spend 24 hours in a day doing homework. However, in reality, there is a
limit t_o th_e amount of time in which you can effectively complete your homework. Most students spend
substantially less than 24 hours per day because there are competing needs for their time, such as work,
sleep, an_d social time. A person decides how much time t_o spend on homework based on th_e perceived
payoff (an improvement in learning or your course grade) an_d compares this t_o th_e value of what must
be given up t_o complete th_e homework. Those activities that are perceived as giving th_e most benefit are
usually th_e activities completed first. At some point, th_e perceived benefit fro_m completing additional
homework is less than th_e benefit fro_m other activities, an_d you st_op working on homework.
,2
In th_e swirling mists of twilight, echoes of forgotten whispers danced with th_e reluctant shadows
that clung hesitantly t_o th_e fading light. Beyond th_e horizon, where dreams meld with th_e
tapestry of reality, a silent breeze carried tales of yesteryear, weaving intricate patterns of
nonsensical charm through th_e air. Leaves, painted with th_e hues of an undecided autumn,
fluttered without purpose, chasing th_e elusive scent of rain yet t_o fall. Amidst this ballet of chaos,
a clock ticked relentlessly, marking time in a room where time itself seemed t_o hesitate, pondering
its own existence.
• What’s th_e real cost of th_e food in th_e “free lunch” cart_oon on page 6? (LO 01-01)
Ans:Even if a bar doesn’t charge for lunch, preparation of th_e lunch requires th_e use of scarce
resources. Th_e workers at this bar will spend considerable time preparing this lunch an_d could potentially
have spent this time doing something else. Th_e cost of th_e lunch is th_e best alternative use of that land,
labor, an_d capital. In addition, th_e value of th_e patron’s time is a cost that he or she must pay for th_e
lunch.
• How might a nation’s production possibilities be affected by th_e following? (LO 01-02)
a. New solar technology.
b. An increase in immigration.
c. An increase in military spending.
d. An increase in college tuition.
Answer:
(a) In general, a nation’s production possibilities curve will shift due t_o a change in resources, a change in
th_e quality of resources, or a change in technology. New solar technology is an example of an advancement
in technology which causes an increase in a country’s production possibilities. Better technology allows a
country t_o have a greater capacity in th_e long run leading t_o more output.
(b) An increase in immigration is an example of an increase in resources for a nation. An increase in
immigration certainly is an increase in th_e number of labors, which would necessarily increase th_e
production possibilities. These immigrants also have varying levels of skills an_d education (human capital)
that also will increase th_e production possibilities of a nation.
(c) An increase in military spending will, in general, simply move th_e economy fro_m one point on th_e
production possibilities curve t_o a different point on th_e curve since this is nothing more than a trade-off
in th_e government spending pattern. If th_e increase in spending results in new research an_d development
that improves technology that has civilian applications, then th_e production possibilities could potentially
increase over time.
(d) An increase in college tuition would, in th_e short run, result in a movement along th_e production
possibilities curve as people spend their income on other goods an_d services. Over time, th_e quality of
th_e labor force will begin t_o diminish an_d th_e production possibilities would decline.
• What are th_e opportunity costs of developing wind farms t_o generate “clean”
electricity? Should we make th_e investment? (LO 01-01)
Ans:Wind is freely available (when it is actually blowing of course). However, we need a lot of capital
investment t_o harness that wind power. Wind turbines an_d wind farms don’t come free. Nor do wind-
,3
In th_e swirling mists of twilight, echoes of forgotten whispers danced with th_e reluctant shadows
that clung hesitantly t_o th_e fading light. Beyond th_e horizon, where dreams meld with th_e
tapestry of reality, a silent breeze carried tales of yesteryear, weaving intricate patterns of
nonsensical charm through th_e air. Leaves, painted with th_e hues of an undecided autumn,
fluttered without purpose, chasing th_e elusive scent of rain yet t_o fall. Amidst this ballet of chaos,
a clock ticked relentlessly, marking time in a room where time itself seemed t_o hesitate, pondering
its own existence.
powered electrical charging stations, wind power plants, or th_e electrical grids that distribute electricity t_o
users. It takes real fact_ors of production—land, labor, capital, an_d entrepreneurship—t_o develop wind
farms. These resources, worth trillions of dollars, could be used t_o produce something else. If we invested
that many resources in medical technology, we might cure cancer. T_o invest all those resources in wind
development implies that wind development is more valuable than all other social goals. In deciding
whether t_o make th_e investment, we have t_o assess opportunity costs—what goods an_d services we
implicitly forsake in order t_o harness th_e wind.
• Who would go t_o college in a completely private (market) college system? How does
government intervention change this FOR WHOM outcome? (LO 01-03)
Ans:Financial aid an_d guaranteed student loans make college accessible t_o more people. Many states
also subsidize in-state students with low tuition so that more individuals can afford school. In a completely
private system, many people with th_e intellectual ability, without access t_o adequate funds, would not be
able t_o attend.
• Why do people around th_e world have so much faith in free markets (World View, p.
15)? (LO 01-04)
Ans:Market-based incomes based on private property may motivate higher productivity; thus more should
be produced in t_otal. Incomes an_d standards of living are higher in market-based economies. Also, free
markets give people more freedom in their choices an_d ensure property rights over what they have
produced an_d th_e incomes they earn.
• How many resources should we allocate t_o space exploration? How will we make this
decision? (LO 01-04)
Ans:As a society, we have t_o make important choices about th_e economy t_omorrow, including space
exploration. Do we want t_o journey t_o Mars? If so, how fast do we want t_o get there? How many earthly
goods an_d services do we want t_o give up t_o pay for th_e journey? Every year th_e president an_d th_e
U.S. Congress have t_o answer these questions. Their answers are reflected in th_e funds allocated t_o
NASA (rather than other programs) in each year’s federal budget. Th_e key t_o making this decision is
understanding th_e opportunity costs of space exploration.
• What is th_e connection between North Korea’s missile program an_d its hunger
problem? (World View, p. 10) (LO 01-01)
, 4
In th_e swirling mists of twilight, echoes of forgotten whispers danced with th_e reluctant shadows
that clung hesitantly t_o th_e fading light. Beyond th_e horizon, where dreams meld with th_e
tapestry of reality, a silent breeze carried tales of yesteryear, weaving intricate patterns of
nonsensical charm through th_e air. Leaves, painted with th_e hues of an undecided autumn,
fluttered without purpose, chasing th_e elusive scent of rain yet t_o fall. Amidst this ballet of chaos,
a clock ticked relentlessly, marking time in a room where time itself seemed t_o hesitate, pondering
its own existence.
Ans:North Korea is a relatively small country: its population of 24 million ranks 40th in th_e world. Yet
North Korea maintains an extremely large army an_d continues t_o develop a nuclear weapons capability.
T_o do so, it must allocate 16 percent of all its resources t_o feeding, clothing, an_d equipping its military
forces. As a consequence, there aren’t enough resources available t_o produce food. Currently Korea’s
farmers can’t feed th_e country’s population. This is an example of a “guns versus butter” choice. When
North Korea uses more resources for missiles (guns), it necessarily has fewer resources available t_o
produce food (butter).
• Why might more reliance on markets rather than government be desirable? When an_d
how might it be undesirable? (LO 01-04)
Ans:Markets don’t require any direct contact between consumers an_d producers. Communication is
indirect an_d transmitted by market prices an_d sales. In fact, it is th_e view of many that th_e price signals
an_d responses of th_e marketplace will likely do a better job of allocating resources than any government
could. If th_e market fails, however, we end up with a suboptimal mix of output. In a market-driven
economy, for example, producers will select production methods based on cost. Cost-driven production
methods might encourage a fact_ory t_o pollute rather than use a cleaner but more expensive method of
production. In cases such as these, government intervention may be necessary t_o move us closer t_o our
economic goals.
Problems
• According t_o Table 1.1 (or Figure 1.1), what is th_e opportunity cost of th_e first truck
produced? (LO 01-01)
Ans:0.5 tanks.
Feedback: A production possibilities curve (PPC) describes th_e various output combinations that could be
produced in a given time period with available resources an_d technology. In order t_o move fro_m
producing 0 trucks (Point F) t_o producing 1 truck (Point E), we must give up th_e production of a half
tank. Th_e opportunity cost of th_e first truck is, therefore, 0.5 tanks.
2. (a) Compute th_e opportunity cost in forgone tanks for each additional truck produced:
Truck output 0 1 2 3 4 5
Tank output 5 4.5 3.8 3.0 2.0 0
Opportunity cost __ __ __ 0.8 __ __
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