Answers to Exercises

1. Consumer sovereignty is important because it ensures that the goods and services the consumer most desires and values are produced. Because producers are forced to respond to consumer demands in order to secure profits, individual consumers are able to determine what is produced through their purchases of goods and services.

2. A family is not a household, and a household is not a family. In economic terms a household refers to one or more persons who occupy a unit of housing. So, a family is not a household because a family may be dispersed across many housing units. Furthermore, a household is not a family because individuals of any relationship can occupy a unit of housing.

3. The median value of a series is the number above and below which half the values in the series lie. To obtain the median of this series, we must first order the numbers from high to low values: 12, 10, 10, 9, 8, 7, 6, 5, 4, 3, 1. Thus, 7 is the median in the series because half the values lie above 7 and the other half lie below 7.

4. Household spending in the form of consumption is the largest component of total spending. International sector spending is the smallest component. The business sector's spending for investment is a small component of total spending, but its volatility is believed by economists to make this sector more important than its size might suggest.

5. Net exports are the difference between a country's exports and its imports. When imports are greater than exports, net exports will be negative. In terms of the circular flow of income and product, there will be a net leakage from the domestic economy to the international economy.

6. Whenever a unit of output is produced, the owners of the resources that were used in production must be paid. These payments, which take the forms of wages, rents, interest, and profits, exhaust the proceeds from the unit of output. Therefore, the value of output is always equal to the flow of income it produces.

7. In the short run total spending, income and output will decline. This is because a decline in spending causes income and output to also fall.

8. Because the quota limits imports, net exports are higher than they would have been without the quota. The increase in net exports means that spending on domestically produced goods and services is now higher, which leads to the production of additional output. Domestic producers of goods that compete with those goods on which the quota is imposed will benefit by receiving higher prices for their goods than they would have without the quota. Consumers are hurt by the quota because they cannot obtain all of the foreign goods they desire and because they must pay artificially high prices. Foreign producers are also hurt because they cannot sell all of the products that they could have if no quota had been imposed.

9. See the text chapter for an example of the circular flow diagram. If households increase saving, then payments for goods and services go down by the amount that saving goes up. In the context of the diagram (without government), the value of national output and income will drop unless investment rises by the amount that saving rises and household spending falls.

10.a. A = $9 million; B = -$3 million; C = -$6 million.

b. A has a trade surplus; B and C have trade deficits.

11. As tastes change, the demand for drive-in movies declines and causes the equilibrium price to fall while the demand for indoor movies rises and causes the equilibrium price to rise. Quantities supplied respond to the change in demand and corresponding changes in prices.

12. Middle-aged households are in their peak income-earning years. Young households are gaining labor-market experience and learning skills that will be rewarded later. Old households have many retired individuals who have lower incomes.

13. There are many sole proprietorships because this is the simplest form of business organization, and new and small businesses will choose this form. Corporations tend to be much larger than sole proprietorships and thus have greater revenue. Many successful firms start as sole proprietorships and then incorporate after reaching a substantial size.

14. Households: consumption spending; business firms: investment; government: government spending; international sector: net exports. Magnitude and example: 1. Consumption: A household buys a loaf of bread. 2. Government spending: The government buys a stop sign and installs it on a corner. 3. Investment: A fast-food store buys a dishwasher. 4. Net exports: A Mexican firm imports a truckload of Budweiser beer.

15. Look at the circular flow diagram in the next chapter for an example.

Answers to Study Guide Homework

1. Households own the factors of production; businesses pay for their use.

2. One or more people who occupy a housing unit.

3. Canada and Japan

4a. Price and quantity of iguanas have increased; price and quantity of parrots have decreased

b. Consumer sovereignty

5. Compared to partnerships, the limited liability aspect of corporations makes attracting investors much easier. Investors risk only the amount of their investment in a corporation; in a partnership, a wealthy investor may end up liable for all the debts of the partnership.

Historical note: the corporate form of business was developed initially to make possible trading companies like the British East India Company.

Answers to Internet Exercise

This exercise accesses the Economic Report of the President through the same internet site used in Chapter 2. While similar to the previous exercise, questions are expanded to cover the calculations and concepts of net exports, trade surpluses and deficits. By obtaining the most recent information, students will be able to do a comparative analysis of trade by area for recent years. Solutions that follow are based on the first 3 quarters of 1997 data annualized and are subject to updating and revision. As further discussion, have students indicate the impacts of a trade deficit for the US.

1.

Trade surpluses exist in the "Other Industrial Nations" category only, which includes Australia, New Zealand and South Africa.

Net exports to Japan = -56 billion

3. Both total exports and imports have increased, while the US trade deficit has remained approximately the same. Exports and imports continue to grow to/from most countries.