Answers to in-text Questions in Economics (6th edition)

Appendix 1
Page A:2 What else is the diagram telling us? That below a certain level of income the person spends nothing at all on entertainment. That even if the persons income dropped to zero, some food would still be purchased (presumably by borrowing or begging the money). That as income rises the proportion spent on food falls. That as income rises the proportion spent on entertainment rises. That although as income rises, a smaller amount is spent out of each pound on food, the rate at which this amount falls gradually gets less (the curve changes slope less rapidly). That although as income rises, a larger amount is spent out of each pound on entertainment, the rate at which this amount rises gradually gets less (the curve changes slope less rapidly).

The table in Box 1.2 shows time-series data for four different variables for four different countries. Would there have been any advantage in giving the figures for each separate year? Would there have been any disadvantage? Advantages: more detailed information; peaks and troughs can be more precisely identified in terms of both timing and magnitude; might identify trends within the three-year periods. Disadvantages: more information to take in; may make long-term trends harder to identify; may give undue weight to short-term aberrations.

A:3 What was the level of unemployment mid-way between quarter 2 and quarter 3 2004? About 1.41 million.

How would it be possible to show three different lines on the same diagram? You could simply use three different vertical scales one for each line. You could actually show the units of two (or even all three) on one of the vertical axes. If you glance at page 558 of the text, you will see an example of this (Figure 19.11).

A:4 Could bar charts or pie charts be used for representing time-series data? Bar charts are frequently used for this purpose. If you look at Figure (a) in Box 8.5 on page 216 of the text, you will see an example. Pie charts are not so suitable for this purpose, unless we want to see how something has been divided up over a period of time. For example, we may want to represent how a persons annual income is spent over the course of the year and divide the pie into twelve segments, each one representing the proportion of annual income spent in that month. The twelve segments could be represented in chronological order going clockwise round the pie. A:5 1. If the vertical scale for Figure A1.2 ran from 0 to 5 million, how would this alter your impression of the degree to which unemployment had changed? Unemployment would seem to have been more stable over the period. The fall in unemployment over the period would seem to be smaller. (Of course, there would be no real difference at all.)

2. What are the advantages and disadvantages of presenting data graphically with the axes starting from zero? You can get a clearer impression of the percentage rate of change of a variable. On the other hand, if the values of the variable in question start from a high level (e.g. unemployment fluctuating between 2.2 and 2.6 million), then to have the axis running from, say, 2.0 to 3.0 millions, will show up the fluctuations more dramatically. It is like putting a magnifying glass on the information.

Answers to questions in Economics (6th edition) by John Sloman Page A:6 1. If a bank paid its depositors 3 per cent interest and inflation was 5 per cent, what would be the real rate of interest? 2 per cent. The real value of your deposits would be falling by 2 per cent per year. 2. Has your real income gone up or down this last year? Look at the percentage increase in your nominal income, and then deduct the rate of inflation. (Note that not all goods and services go up in price at the same rate, and thus the headline rate of inflation, based on the consumer prices index (see page A:7 of the text), may not fairly reflect the increases in costs you personally have faced.)

Does this mean that the value of manufacturing output in 2000 was 1.4 per cent higher in money terms? No. If prices have risen (as they invariably do), the value of output in money terms will rise more than the volume of output.

A:7 What was the growth rate in manufacturing output from (a) 1982 to 1983; (b) 2000 to 2001? Using the formula (It It1)/It1 100, gives: (a) (73.6 72.1)/72.1 100 = 2.08% (b) (100 101.4)/101.4 100 = 1.38%

If the CPI went up from 150 to 162 over 12 months, what would be the rate of inflation? Using the formula (CPIt CPIt1)/CPIt1 100, gives: (162 150)/150 100 = 8%

A:9 On a diagram like Figure A1.8 draw the graphs for the following equations: y = 3 + 4x y = 15 3x In the first case, the graph would cross the vertical (y) axis at 3. It would be upward sloping and have a slope of 4: i.e. as you move up the line, for every one unit you move along the horizontal axis you would move 4 units up the vertical. In the second case, the graph would cross the vertical axis at 15. It would be downward sloping and have a slope of 3: i.e. as you move down the line, for every one unit you move along the horizontal axis you would move 3 units down the vertical. Note that both graphs are a straight line. This is because there is no x squared term (or any other x term to a power greater than 1).

What shaped graph would you get from the equations: y = 6 + 3x + 2x y = 10 4x + x (If you cannot work out the answer, construct a table like Table A1.9 and then plot the figures on a graph.) In the first case, the graph will be a curve crossing the vertical axis at 6. As the value of x increases above 0 and the x term grows more and more rapidly, the curve will slope upwards more and more steeply. In the second case, the graph will be a curve crossing the vertical axis at 10. As the value of x increases above 0, initially the curve will slope downwards because the 4x term will be dominant; but then the curve will slope upwards again as the x term begins to dominate.

Appendix 1 Page A:10 What would be the marginal cost equation if the total cost equation were: C = 15 + 20Q 5Q + Q What would be the marginal cost at an output of 8? To find the marginal cost equation you differentiate the total cost equation: i.e. marginal cost = dC/dQ = 20 10Q + 3Q. Thus when Q = 8, MC = 20 80 + 192 = 132.

What is the meaning of a negative profit? A loss. (When the total cost of producing a given number of units of output exceeds the total revenue earned by selling them.)

A:11 (Box A1.1) If the opposition were indeed to claim that a fall in unemployment was bad news, what would have to be the value of dN/dt: positive or negative? Positive. If the dN/dt term is negative (i.e. unemployment is falling) but the dN/dt term is positive, this means that the rate of fall in unemployment is slowing down: signs, the opposition would say, that the improvement is beginning to come to an end: bad news! (Looking at Table A1.1 and Figure A1.2, the opposition may well have claimed this in 2000 Q3 or 2001 Q1.) A:12 Given the following equation for a firms average cost (AC) i.e. the cost per unit of output (Q): AC = 60 16Q + 2Q (a) At what output is AC at a minimum? (b) Use the second derivative test to prove that this is a minimum not a maximum. (a) AC is at a minimum where dAC/dQ = 0 i.e. where 16 + 4Q = 0 i.e. where Q = 4 (b) This is a minimum rather than a maximum because the second derivative is positive. (dAC/dQ = 4)