978-0134078816 Chapter 2 Solution Manual

CHAPTER 2

1.1 Answers will vary, but should include:

(a) the value of alternative uses of time (studying for final exams, other forms of leisure)

(b) the value of alternative uses of time (other forms of leisure or exercise)

(d) the value of the goods and services that the government could have purchased with the money

used to subsidize the airline

1.2 Disagree. To be efficient, an economy must produce what people want. This means that in

1.3 Opportunity costs of building the bridge include the value of other goods and services that the

government of Mallsburg could have purchased with $25 million or the value of the goods and

services that taxpayers could have purchased with the tax revenue used to finance the bridge, as

Benefits of the new bridge include reduced travel time for shoppers and commuting time for

workers, increased sales tax revenues for Mallsburg, and gains for shopkeepers located in the

main mall.

There may be other quality of life costs and benefits that are difficult to sort out without more

Beyond the costs and benefits, there is always the question of distribution. Is the income tax

system of Mallsburg equitable? Are the shopkeepers likely to lose more than those likely to gain?

1.4 (a) For Alexi, the “cost” of a street taco is one-fourth of a Cuban sandwich. For Tony, the “cost”

303

Solutions to Problems 304

(f) Alexi should specialize in street taco production and earn 1,600 x $2 = $3,200. Tony

1.5. (a) Sherice sacrifices the value of goods and services that could have been purchased with the

income from work in order to obtain more leisure today. To the extent that this income will

need to be replaced to finance her education, Sherice substitutes future work for present

(b) For Frank, the opportunity costs are the alternative uses of time spent working out and the

(c) Time and money spent today on maintenance is an investment. By reducing resources

(d) Jim may get to work faster, but at the risk of an accident or ticket, which could be costly.

1.6 (a) Orion

Solutions to Problems 305

(d) Orion: 600 workers to granite

200 workers to blueberries

Produces 3,600 of each

These production points are shown on the graphs for part c.

(e) Orion moves all labor to granite and produces 4,800 tons.

Scorpius moves 320 out of blueberries into granite.

Orion ends up with 3,800 of each (4,800 − 1,000 = 3,800 tons of granite; 3,800 bushels of

blueberries from Scorpius.

1.7 (a) c, d, e

1.8 (a)

Solutions to Problems 306

(b) Yes, increasing opportunity cost applies. The opportunity cost of the first 12 million yards of

(c) Over time, as the number of looms increases, the capacity to produce carpet with the

(d) See graph in part (a) above.

(e) Before the introduction of the new technology, production of 15 thousand looms left enough

1.9 As stated in the Economics in Practice feature, producing a meal takes two basic ingredients:food

and time. For individuals who work, the opportunity cost of time for preparing meals is high. For

1.10 The key here is the opportunity cost of Betty Lou’s time. Every time she details one car, she gives

up the chance to wash three cars (since washing a car takes 20 minutes and detailing a car takes

one hour.) But she earns $60 for washing three cars and only $50 for detailing a car. Clearly,

1.11 Even with winning these free season tickets to the Saints’ games, you would still experience an

1.12 Compared to larger cities and to towns that are geographically closer to larger cities, these towns

Solutions to Problems 307

1.13 Billabong experiences increasing opportunity costs because for every surfboard it produces, it

must give up an increasing number of kayaks. When Billabong moves from production

alternative A to production alternative B, it gives up 4,000 kayaks to gain 20,000 surfboards.

When it moves from alternative B to alternative C, it must give up 6,000 kayaks to gain 20,000

1.14 (a) Education can be thought of as adding “human capital” as an added resource, and this moves

(b) The mild weather has increased the productive capacity and increases the amount of

(c) An increase in the number of workers in the country increases the labor force, which

(d) An increase in unemployed workers does not change the production possibilities curve, but

(e) Technological innovation allows the nation to produce more with existing resources, so the

(f) The reduction in productive capacity will reduce the amount of production possible in the

2.1 A command economy is one in which the basic economic questions are answered by a central

government. Through a combination of government ownership of state enterprises and central

planning, the government, either directly or indirectly, sets output targets, incomes, and prices. A

laissez-faire economy is one in which individual people and firms pursue their own self-interest,

2.2 (a) Theppf curve is a straight line intersecting the Y-axis at 1,000 units of luxury goods and

Solutions to Problems 308

(b) Society’s production could be inside the ppfas a result of (i) unemployment or

(c) Answers will vary, but the decision should be based on the relative value of necessities and

(d) If left to the free market, income distribution will depend on some combination of individual