Chapter 1 Vast resources would have been wasted as pilots

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Principle 7: Resources should be used efficiently to

achieve society’s goals. Priceline.com exploited an oppor-

tunity to use resources more efficiently. It is inefficient

to have empty hotel rooms and airline seats if someone is

willing to pay some price to use them on short notice.

Principle 8: Because people usually exploit gains from

trade, markets usually lead to efficiency. It is inefficient

to have planes flying with empty seats and hotels with

unoccupied beds. Thus, introducing a market for those

items—which is what Priceline.com did—improves

industry so that it could survive the temporary downturn.

Principle 10: One person’s spending is another person’s

income. In the aftermath of the attacks of September

2001, as people stopped spending on items like travel the

income of airline workers was severely reduced.

Chapter 2

1. What is the opportunity cost associated with having a

worker wander across the factory floor from task to task

or in search of tools and parts?

Suggested Solution

1. The opportunity cost of a worker wandering across the

Suggested Solution

1. Principle 1: People must make choices because resources

are scarce. Neither money nor time is unlimited; they are

both scarce resources. Priceline.com caters to customers

who have chosen to sacrifice some of their preferences

about convenience or quality in order to get a lower

How much more a customer is willing to pay for a

ticket to a destination depends upon how much time

and inconvenience is saved by purchasing the higher

priced ticket.

Likewise, how much more a customer is willing to

nities to make themselves better off by using its services.

Priceline.com also responded to incentives to make itself

better off by expanding into new profitable markets

such as Europe.

Principle 5: There are gains from trade. Travelers gain

from using Priceline.com’s networks of hotels to find a

hotel rather than doing the research themselves. They

gain from using Priceline.com’s services to book a flight

rather than contacting each airline individually. Also,

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fewer customers, so fewer rides are transacted.

Chapter 4

1. How does Medallion Financial benefit from the restric–

tion on the number of New York taxi medallions?

Suggested Solution

1. Medallion Financial benefits from the restriction

2. What will be the effect on Medallion Financial if New

York companies resume widespread use of limousine

services for their employees? What is the economic moti-

vation that prompts companies to offer this perk to their

employees? (Note that it is very difficult and expensive to

own a personal car in New York City.)

vices hurts Medallion Financial. By offering limousine

services to their employees as a perk, companies are

in effect getting around the restriction on the number

of taxis in the city by creating their own, company-

specific taxi fleets.

zero, leading the value of a medallion to fall to zero.

There would be no need to take out a loan to buy one.

In addition, the value of Medallion Financial’s existing

loans would fall significantly.

Chapter 5

1. Why do you think it was profitable for Li & Fung to go

beyond brokering exports to becoming a supply chain man–

Suggested Solution

3. Before the innovations in lean production, Japan had a

comparative advantage vis–à-vis the United States in con-

sumer electronics. After the innovations, Japan’s com–

parative advantage vis-à-vis the United States shifted to

auto production.

Chapter 3

1. Before Uber, how were prices set in the market for rides

in New York City? Was it a competitive market?

Suggested Solution

1. Before Uber, prices for rides were set by city regulators.

enough?

Suggested Solution

2. If everyone who wants to get a taxi during good weather

can typically get one, then this implies that the price

set by regulators is approximately equal to the market-

increase, a shortage of taxis arises.

3. How does Uber’s surge pricing solve the problem

described in the previous question? Assess Kalanick’s

claim that the price is set to leave as few people possible

without a ride.

Suggested Solution

3. Uber’s surge pricing solves this problem because it

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Suggested Solution

2. After World War II, Montgomery Ward was betting on

nomic understanding over the course of the 1930s led to

better policies thereafter. If this is true, how did better

policies after World War II end up hurting Montgomery

Ward?

er spending surged, allowing more competitors to enter

the department store industry.

Chapter 7

1. Why do businesses care about GDP to such an extent

that they want early estimates?

Suggested Solution

1. Businesses care about GDP because it’s the prime indica–

that derives the total value of output by adding up total

spending on domestically produced goods and services.

The Institute for Supply Management, by contrast, surveys

producers to find out how much they’re producing; it is, in

a sense, using the method of calculating GDP that adds up

the value of production of final goods and services.

3. If private firms are producing GDP estimates, why do we

need the Bureau of Economic Analysis?

Suggested Solution

3. First, much of the data Macroeconomic Advisers uses

Suggested Solution

1. By sourcing inputs from various suppliers across many

Suggested Solution

2. Comparative advantage is the principle that underlies Li

& Fung’s decisions. Inputs that require more skill or are

3. Why do you think a retailer prefers to have Li & Fung

arrange international production of its jeans rather than

purchase them directly from a jeans manufacturer in

mainland China?

Suggested Solution

3. A retailer that purchased jeans directly from a manu-

facturer in mainland China would not benefit from the

gains from trade that arise from sourcing inputs from

Chapter 6

1. What caused the steep decline in department store sales

in the 1930s?

Suggested Solution

1. The steep decline in department store sales during the

1930s occurred as the U.S. economy went through the

Great Depression. There was a significant decline in con-

sumer spending during the Depression that then led to a

large drop in department store sales.

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2. Do scientific advances play any role in the progress we’ve

described? Explain.

Suggested Solution

2. As discussed in the answer to the previous question,

scientific advances have allowed aircraft to become

more aerodynamic through the sophisticated use of new

computing technologies. Additionally, scientific advances

3. Over the last fifty years, airline travel has become more

affordable. By utilizing newer technologies, airlines have

been able to pass along cost savings to passengers. A

decrease in the cost of air travel has resulted in many

more passengers flying today than in the past, when a

plane ticket cost more.

The common complaint of airline passengers about

cramped seating does not refute the claim of technologi-

Chapter 10

1. What market inefficiency is being exploited by Grameen

Bank? What is the source of this inefficiency?

Suggested Solution

1. Grameen Bank is exploiting the inefficiency that arises

2. What tasks of a financial system does micro–lending

perform?

Suggested Solution

2. Micro-lending performs the tasks of reducing transac–

tions costs for people who need funds—for example, they

can borrow from Grameen rather than having to sell

possessions to raise needed funds. It reduces financial

Chapter 8

1. Use the flows shown in Figure 8–7 to explain the role of

temporary staffing in the economy.

Suggested Solution

1. Figure 8-7 shows the flow of workers as they move from

employed to unemployed to not in the labor force. The

2. What is the likely effect of improved matching of job-

seekers and employers through online services listings

on the unemployment rate?

Suggested Solution

2. Unemployed workers are classified into three differ-

ent types of unemployment. A worker may be unem–

3. What does the fact that temporary staffing fell sharply

during the 2008–2009 surge in unemployment suggest

about the nature of that surge?

Suggested Solution

3. As unemployment surged during the Great Recession,

employers were shedding both permanent and temporary

jobs. Temporary employment normally decreases dur-

Chapter 9

1. A modern jet airliner does pretty much the same thing as

an airliner from the 1960s: it gets you there from here, in

about the same time. Where’s the technological progress?

Suggested Solution

1. The most notable technological progress is invisible to

the naked eye. Small but significant design improve-

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the aggregate price level and, in the short run, leads to a

decrease in aggregate output as the economy experiences

negative supply shock such as this is one of the causes

of recessions.

2. The Fed had to make a choice between fighting two evils

in early 2008. How would that choice affect Maersk com–

pared with, say, a company producing a service without

expensive raw-material inputs, like health care?

Suggested Solution

cost of further raising the aggregate price level.

The Fed chose to pursue a policy of increasing aggre–

gate demand, which—other things equal—results in a

further increase in the aggregate price level. A higher

companies, such as health care providers, that don’t rely

on those inputs. If the Fed had instead chosen to pursue

a policy of reducing aggregate demand, this would have

resulted in a decrease in fuel costs and a decrease in the

aggregate price level which would have benefited compa-

nies, like Maersk, that are more immediately affected by

raw-material prices. Of course, a decrease in aggregate

demand could also result in a drop in demand for ship–

ping services.

3. The trucking industry in Europe, which also relies on

fuel, experienced a similar fate as the shipping indus–

try when fuel costs surged. But, unfortunately for the

trucking industry, it was also experiencing a decrease

in demand for its services. As Europe slid into a reces–

sion, aggregate demand shifted leftward as consumer

spending fell. The shipping industry, in contrast, was for-

tunate not to be hit by both rising fuel costs and falling

demand.

Suggested Solution

3. We would expect communities that received Grameen

Chapter 11

1. Why did a national slump that began with housing affect

companies like General Motors?

Suggested Solution

1. As we learned in the chapter, a fall in current disposable

income, as well as falls in wealth and expected future

disposable income, lead to a fall in consumer spending.

Suggested Solution

2. It was a good bet that things would eventually improve

because recessions have always been followed by

3. How does this story about General Motors help explain

how a slump in housing—a relatively small part of the

U.S. economy—could produce such a deep national

recession?

Suggested Solution

3. The story of GM illustrates how the multiplier process

takes place. The fall in housing led to a fall in con–

sumer spending which hurt auto manufacturers like

Chapter 12

1. How did Maersk’s problem in 2011 relate to our analysis

of the causes of recessions?

Suggested Solution

1. In late 2010, Maersk faced sharply higher fuel prices,

a price spike that affected all other businesses and

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up the face value of a card they can use for necessi-

ties than one usable only for non-necessities. So more

potential buyers compete to buy cards for necessities,

never “sells” at a discount.

Suggested Solution

3. Cash can be used to purchase any good or service, neces–

sity or non-necessity; it is accepted everywhere. Also, it

comes in any face value you want. So there will always be

with gift cards instead of rebatechecks.

Suggested Solution

4. Most customers who receive a rebate check deposit the

check into their checking account, withdraw the cash,

and use it to pay for purchases. However, those purchases

need not be from the issuer of the rebate check. In con-

not on a rebate check. So retailers will prefer gift cards.

5. Recent legislation restricted retailers’ ability to impose

fees and expiration dates on their gift cards and

mandated greater disclosure of their terms. Why do

increase breakage (the amount of a gift card that

accrues to the retailer rather than the cardholder),

such as imposing fees and expiration dates. Not telling

customers about these policies increases breakage. So

Congress has intervened to restrict these practices.

Chapter 15

1. Why did PIMCO’s view that unemployment would stay

1. The Taylor rule suggests that the Fed sets interest rates

based on the unemployment rate and the inflation rate.

If unemployment stays high while inflation is low, this

would indicate that the Fed would keep policy rates

low—in fact, close to zero.

Chapter 13

1. How did the political reaction to government funding for

the Solana project differ from the reaction to more con-

Suggested Solution

1. Unlike roads and schools, the Solana project was con-

troversial because it meant that government funds were

paid to a non-American firm. it was also controversial

2. In the chapter we talked about the problem of lags in

discretionary fiscal policy. What does the Solana case

tell us about this issue?

Suggested Solution

2. Unfortunately, Solana is a good example of the prob–

3. Is the depth of a recession a good or a bad time to under-

take an energy project? Why or why not?

Suggested Solution

3. Assuming that a solar plant was a good thing to build,

Chapter 14

1. Why are gift card owners willing to sell their cards for a

cash amount less than their facevalue?

Suggested Solution

1. A gift card is not as liquid as cash. Cash can be turned

into merchandise in any store; a gift card can be used

only at its issuer.

Suggested Solution

2. Retailers like Walmart, Home Depot, and Whole Foods

sell necessities, but the Gap and Aeropostale sell non-

necessities. There will be a larger pool of potential

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Suggested Solution

2. Long-term rates largely reflect expectations about

Suggested Solution

3. Even though the federal funds rate stayed near zero in

Chapter 16

1. How can a government obtain revenue by printing

money when someone else actually prints the money?

Suggested Solution

1. If you think about it, seignorage doesn’t really come

2. Why, exactly, would Gaddafi have resorted to the print-

ing press in early 2011?

Suggested Solution

2. The embattled Gaddafi regime was in the classic posi-

tion of governments that resort to the printing press:

3. Were there risks to the Libyan economy in releasing

those dinars to the new government?

Suggested Solution

3. By releasing the dinars to the new Libyan govern–

ment, Britain was in effect putting that government in

Chapter 19

here, although Abenomics depends in part on promises

to keep money loose—that is, to keep interest rates low

for longer than previously expected—rather than just

Suggested Solution

2. When a company like Toyota or Subaru exports cars

from Japan, many of its costs—wages in particular—are

presumably fixed in yen, while it is selling in markets

where competitors have costs fixed in dollars or euros.

So a fall in the yen gives the Japanese companies a cost

advantage, raising their profits.

3. For Toyota, the benefits of a weaker yen apply only to

the part of its production that is exported from Japan.

As far as its U.S. plants are concerned, it is, in effect,

an American company. So the benefits for Toyota are

limited. Subaru, on the other hand, is still mainly a

Japan-based producer, so it gets the full benefit of

a weaker yen.

ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT BCS-7