Chapter 1
The Nature of Economics

Answers to Even-Numbered Problems
2. This issue involves choice and, therefore, can be approached using the economic way of thinking. In
the case of health care, an individual typically has an unlimited desire for good health. The individual
has a limited budget and limited time, however. She must allocate her budget across other desirable
goods, such as housing and food, and must allocate her time across waiting in the doctor’s office,
work, leisure, and sleep. Hence, choices must be made in light of limited resources.
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The Nature of Economics
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4. Microeconomics is the study of individual decision making, whereas macroeconomics examines the
aggregate behavior of the entire economy.
(a) Macroeconomics
(b) Microeconomics
(c) Microeconomics
(d) Macroeconomics
(e) Macroeconomics
(f) Microeconomics
6. The rationality assumption states that people do not intentionally make choices that leave them worse
off. The bounded rationality hypothesis suggests that people are almost, but not completely, rational.
8. Suppose that there is a change in the environment that a person faces, and the person adjusts to this
change as predicted by the rationality assumption. If the new environment becomes predictable, then
the individual who actually behaves as predicted by the traditional rationality assumption may settle
into behavior that appears to involve repetitive applications of a rule of thumb.
10. (a) The model using prices from the Iowa Electronic Market is more firmly based on the rationality
assumption, because people who trade assets on this exchange based on poor forecasts actually
experience losses. This gives them a strong incentive to make the best possible forecasts. Unpaid
respondents to opinion polls have less incentive to give truthful answers about whether and how
they will vote.
(b) An economist would develop a means of evaluating whether prices in the Iowa Electronic Market
or results of opinion polls did a better job of matching actual electoral outcomes.
12. (a)
(b)
(c)
(d)
Positive
Normative
Normative
Positive
14. To say that people exhibit “irrational exuberance” is to say that they do not act in their own selfinterest. In fact, self-interested individuals are likely to take into account possible adverse situations
that may arise in the stock market.
Appendix A
A-2 a. direct
b. inverse
c. direct
A-4 a.
b.
c
d.
linear
nonlinear
linear
linear
Chapter 1
A-6
A-8 (a)
(b)
(c)
(d)
(e)
(4, 80):
(2, 20):
(0, 0):
(2, 20):
(4, 80):
negative
negative
zero
positive
positive
The Nature of Economics
3
Chapter 1
The Nature of Economics
4
Chapter 2
Scarcity and the World of Trade-Off

Answers to Even-Numbered Problems
2. The opportunity cost of attending the concert is the next-best use of the time spent at the concert. If
bad weather extends the amount of time spent on an evening at the concert, then there is an additional
opportunity cost in the form of the next-best uses of that additional time.
4. If the student allocates additional study time to economics in order to increase her score from 90 to 100,
her biology score declines from 50 to 40, so the opportunity cost of earning 10 additional points in
economics is 10 fewer points in biology.
6.
8. Combination F entails production of less human capital than combination C, so choosing combination
F today would result in a smaller output shift in the production possibilities curve than would be
experienced if combination C were chosen instead.
10. Yes, you and your roommate should specialize in the task in which you have a comparative advantage.
You should specialize in folding laundry and your roommate in preparing meals. If you fold a basket
of laundry, you must forgo the time that it would take to prepare two meals. For your roommate to
fold basket of laundry, the time that it takes to prepare three meals must be given up. Suppose that
you “trade” folding a basket of laundry for preparing 2.5 meals. You gain 0.5 meals, which is
equivalent to one half hour of meal preparation time. Hence, you save one half hour for every
basket of laundry you fold for your roommate in exchange for an hour of meal-preparation time.
12. In fact, it may be that the professor is very efficient at doing yard work relative to teaching and
research activities, so in fact the professor may have a comparative advantage in doing yard work.
14. C
16. A
Chapter 1
The Nature of Economics
5
Chapter 3
Demand and Supply
Answers to Even-Numbered Problems
2. If quantity demanded increases by 30 million at each price, then the new equilibrium price is $22 per
DVD, and the new equilibrium quantity is 100 million DVDs. This is an increase in demand, which
could be brought about by a change in any of the ceteris paribus conditions relating to the demand
curve. For example, an increase in the demand for DVDs could arise from either a decrease in the
price of a complement, such as DVD players, or an increase in the price of a substitute, such as
videocassette tapes or movies on demand from cablevision providers.
4. (a) Storage racks and boxes are complements in the consumption of rewriteable DVDs, so increases
in their prices cause the demand for rewriteable DVDs to decline. The market clearing price of
and equilibrium quantity of rewriteable DVDs both decline.
(b) Computer drives that read the information on rewriteable DVDs are a complement in the
consumption of rewriteable DVDs, so a fall in the price of this item generates an increase
in the demand for rewriteable DVDs. The market clearing price of and equilibrium quantity
of rewriteable DVDs both increase.
(c) Flash memory drives are a substitute in consumption of rewriteable DVDs. Thus, a dramatic
increase in the price of flash memory drives brings about an increase in the demand for rewriteable
DVDs, which causes the both the market clearing price and equilibrium quantity of rewriteable
DVDs to increase.
(d) As long as rewriteable DVDs are a normal good, the rise in consumers’ incomes causes the
demand for rewriteable DVDs to increase. This causes both the market clearing price and
equilibrium quantity of rewriteable DVDs to increase.
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The Nature of Economics
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(e) Because consumers expect a lower price of rewriteable DVDs in the future, their current demand
for rewriteable DVDs decreases. The result is a decrease in both the market clearing price and
equilibrium quantity of rewriteable DVDs in the present.
6. The imposition of this tax decreases the supply of Roquefort cheese, which would cause the supply
curve to shift leftward. The market price increases, and equilibrium quantity falls.
8. (a) The rise in the price of paper, a key input in textbook production, causes a decrease in the supply
of textbooks.
(b) An increase in the market price of economics textbooks causes an increase in the quantity of
textbooks supplied.
(c) A rise in the number of textbook publishers increases the supply of textbooks.
(d) If publishers expect the market price of textbooks will rise next week, the current supply of
textbooks will decline.
10. Receipt of the per-unit subsidy encourages sugar producers to increase the quantity of sugar supplied
at any given price, so the market supply curve shifts to the right. The market price of sugar declines,
and the equilibrium quantity of sugar increases. In the market for artificial sweeteners, the fall in the
price of sugar (a substitute good) brings about a fall in demand. The demand curve for artificial
sweeteners shifts to the left, which brings about a decline in the market price and a decrease in the
equilibrium quantity of artificial sweeteners.
12. The technological improvement in Internet calling increases the supply of Internet phone services,
which causes the equilibrium price of Internet phone services to decrease. Internet phone services
are a substitute in consumption of traditional phone services, so the decrease in the price of Internet
phone services causes the demand for traditional phone services to decrease. There is a decrease in
both the market clearing price and equilibrium quantity of traditional phone services.
14. Because processor chips are an input in the production of personal computers, a decrease in the price
of processor chips generates an increase in the supply of personal computers. The market price of
personal computers will decrease, and the equilibrium quantity will increase.
Chapter 4
Extensions of Demand and Supply Analysis
Chapter 1

The Nature of Economics
Answers to Even-Numbered Problems
2. The ability to produce drugs at lower cost leads to an increase in the market supply of drugs, so the
supply curve shifts rightward. At the same time, the increased demand for drugs by an aging
population shifts the market demand curve rightward. Thus, the equilibrium quantity of drugs
increases, but the market price may rise, fall, or remain unchanged (as shown).
4. At the floor price, the quantity of sugar supplied by U.S. sugar producers exceeds the quantity of
sugar demanded in the United States, so there is surplus sugar.
7
Chapter 1
The Nature of Economics
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6. At the ceiling price of Internet access, P1, the quantity of hours of Internet access demanded exceeds
the quantity of hours of access legally supplied by Internet service providers (ISPs), so there is a
shortage of hours of Internet access. If a black market develops, the implicit supply curve is S', and
the actual price will end up between P1 and P2.
8. The fact that drug sellers receive legal penalties if caught means that there is an extra cost of
selling drugs over and above those associated with production and distribution of these substances.
Legalization would eliminate these costs and cause the market supply curve to shift rightward. This
would indeed reduce the market price and increase the equilibrium quantity. To the extent that drug
users commit crimes to fund currently high market prices, drug legalization could indeed reduce the
incentive for such criminal activities. At the same time, to the extent that drug use causes a national
health problem, increased use of legalized drugs could expand the scope of that problem. Thus, both
sides have potentially legitimate points.
10. In the absence of price supports, consumers would have bought 12 billion kilograms of wheat at the
market price of $0.10 per kilogram, thereby spending $1.2 billion. Hence, under the government’s
price support program, wheat farmers in Pakistan are receiving $2.4 billion more for wheat than they
would have in the absence of the price support.
12. (a) The reduction in the allowable rental rate, or price of rental offices, reduces the quantity of
offices that owners are willing to supply. Hence, the quantity of offices leased to tenants
declines.
(b) Because owners of office buildings earn lower rents and lease fewer offices, they reduce the
quantity of custodial services demanded at any given market wage rate. This causes the
equilibrium wage rate to decline, and the equilibrium quantity of custodial workers hired falls.
14. (a) The living wage of $8.50 per hour is higher than the equilibrium wage of $7.50 per hour that fast
food workers previously earned. Current fast food employees will desire to work more hours, and
more people will desire to obtain jobs at fast food restaurants. The quantity of labor supplied will
increase.
(b) The increase in the hourly wage from $7.50 to $8.50 induces fast food restaurants to cut back on
the number of people employed each hour their restaurants are in operation. The quantity of labor
demanded will decrease.
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The Nature of Economics
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(c) At the equilibrium wage of $7.50 per hour, the quantity of labor demanded was equal to the
quantity of labor supplied, so there were no unemployed fast food workers. At the higher living
wage of $8.50 per hour, the quantity of labor supplied is higher, and the quantity of labor demanded
is lower. Thus there is an excess quantity of labor supplied, or surplus labor, which means that
some fast food workers will now be unemployed.