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S
D0
D1
Price of corn
P1
P0
D0
D1
S
Quanty of farmland
Figure 2
Q
P0
P1
CHAPTER 12
1.1 If oil prices were to rise at the same time as the subsidy was given to ethanol production, the
If oil prices were to fall, the demand for corn-based ethanol would decrease, decreasing the
Figure 1
303
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Figure 3
Solutions to Problems 304
1.2 Answers will vary, but each story should take into consideration basic information about labor
Following is a list of what may take place in each of the three situations.
For the situation in part a, rising home values cause household wealth to increase, which will
In part b, the increase in health care costs will decrease savings (capital supply). This will
In part c, the increase in credit availability to home buyers will increase investment in new
1.3 The cost of chicken is likely to go up. Substitutes for chicken include fish, turkey, and perhaps
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Solutions to Problems 305
2.1 Disagree. Even if shareholders are made worse off, the breakup could be a potential Pareto
2.2 (a) First, calculate MP and MRP (P × MP)
Workers Vegi-Dogs MP
MRP
(P x MP)
0 0 --- ---
1 12 12 60
(b) When the price of vegi-dogs rises to $9, the last column must be recalculated.
Now, 5 workers should be hired.
Workers Vegi-Dogs MP
MRP
(P x MP)
0 0 --- ---
1 12 12 108
(c) If the wage rises to $20 per hour, assuming vegi-dogs still cost $9, only 5 workers should be
(d) Yes, the allocation of labor would be efficient because each firm would hire labor until the
Copyright © 2017 Pearson Education, Inc.
Solutions to Problems 306
2.3 There will likely be trade between Emerald Island and Tropical Springs. Emerald Island will
2.4 Any trade in which two or more people voluntarily exchange goods or services, without having
any effect on third parties, must be efficient. When a transaction is completed is it revealed that
2.5 All are examples of potentially Pareto-efficient changes.
(a) Simple elimination of waste is clearly efficient.
2.6 (a–b) The coin toss is more “equitable,” because both parties have the same chance of winning,
regardless of their incomes. However, with the coin toss, there is no guarantee that the party who
2.7 Demand for G shifts left (from D0 to D1), driving down the price of G from P0 to P1 and creating
losses in the short run for firms in G. Demand for S shifts to the right, causing the price of S to
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Solutions to Problems 307
2.8 (a) Not Pareto efficient. You may be better off since you are enjoying the music, but you are also
2.9 The allocation of labor is inefficient. Since each golf course is hiring the profit maximizing
2.10 Resources are allocated efficiently among firms in a perfectly competitive market because of the
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Solutions to Problems 308
2.11 Society will benefit from more of a good being produced when the price of a good is greater than
3.1 (a) Disagree. Nutritional food can be limited to those who pay for it. Therefore, the private
competitive and therefore charge a price greater than marginal cost.
(c) Agree. It is difficult for consumers to evaluate the skills of a financial planner or to judge the
3.2 (a) Public good—there is no way to limit the benefits of the new fire engines to those who pay,
3.3 When Clarice had the new drainage ditch installed, the decision was based on the utility she
3.4 Items a, c, and d are public goods because they bestow collective benefits on members of society
3.5 A positive externality is a benefit bestowed on an individual or a group who is outside, or
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