Solution Manual of Principles of Economics 7th Edition By Mankiw


Edition: 7th Edition

Format: Downloadable ZIP File

Resource Type: Solution Manual

Duration: Unlimited downloads

Delivery: Instant Download

Solution Manual Of Principles of Economics 7th Edition By Mankiw

ISBN-10: 128516587X, ISBN-13: 978-1285165875


  1. Introduction
  2. The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”
  3. This makes some sense because in the economy we are faced with many decisions (just as a household is).
  4. Fundamental economic problem: resources are scarce.


  1. Definition of scarcity: the limited nature of society’s resources.


  1. Definition of economics: the study of how society manages its scarce resources.
  1. How People Make Decisions


  1. Principle #1: People Face Trade-offs


  1. “There ain’t no such thing as a free lunch.” Making decisions requires trading one goal for another.


  1. Examples include how students spend their time, how a family decides to spend its income, how the U.S. government spends tax dollars, and how regulations may protect the environment at a cost to firm owners.


  1. An important trade-off that society faces is the trade-off between efficiency and equality.


  1. Definition of efficiency: the property of society getting the most it can from its scarce resources.


  1. Definition of equality: the property of distributing economic prosperity uniformly among the members of society.


  1. For example, tax dollars paid by wealthy Americans and then distributed to those less fortunate may improve equality but lower the return to hard work and therefore reduce the level of output produced by our resources.


  1. This implies that the cost of this increased equality is a reduction in the efficient use of our resources.


  1. Recognizing that trade-offs exist does not indicate what decisions should or will be made.


  1. Principle #2: The Cost of Something Is What You Give Up to Get It


  1. Making decisions requires individuals to consider the benefits and costs of some action.


  1. What are the costs of going to college?


  1. We should not count room and board (unless they are more expensive at college than elsewhere) because the student would have to pay for food and shelter even if she were not in school.


  1. We should count the value of the student’s time because she could be working for pay instead of attending classes and studying.


  1. Definition of opportunity cost: whatever must be given up in order to obtain some item.


  1. Principle #3: Rational People Think at the Margin


  1. Economists generally assume that people are rational.


  1. Definition of rational people: people who systematically and purposefully do the best they can to achieve their objectives.


  1. Consumers want to purchase the goods and services that allow them the greatest level of satisfaction given their incomes and the prices they face.


  1. Firm managers want to produce the level of output that maximizes the profits the firms earn.


  1. Many decisions in life involve incremental decisions: Should I remain in school this semester? Should I take another course this semester? Should I study another hour for tomorrow’s exam?


  1. Definition of marginal change: a small incremental adjustment to a plan of action.


  1. Example: Suppose that you are considering calling a friend on your cell phone and the marginal benefit of the 10 minute call is $7.00. Your cell phone costs you $40 per month plus an additional $0.50 per minute.  You typically talk for $100 minutes and have a monthly bill of $90.  If you consider the average cost of a call, you would decide that the benefit of this 10 minute call does not exceed its cost ($9.00).  However, the marginal cost of the call is only $5.00 so the marginal benefit of the call does outweigh its marginal cost.  Cell phone users who have unlimited minutes (free at the margin) often make long and frivolous phone calls.


  1. Suppose that flying a 200-seat plane across the country costs the airline $100,000, which means that the average cost of each seat is $500. Suppose that the plane is minutes from departure and a passenger is willing to pay $300 for a seat. Should the airline sell the seat for $300? In this case, the marginal cost of an additional passenger is very small.


  1. Another example: Why is water so cheap while diamonds are expensive? The marginal benefit of a good depends on how many units a person already has.  Because water is plentiful, the marginal benefit of an additional cup is small.  Because diamonds are rare, the marginal benefit of an extra diamond is high.


  1. A rational decision maker takes an action if and only if the marginal benefit is at least as large as the marginal cost.


  1. Principle #4: People Respond to Incentives


  1. Definition of incentive: something that induces a person to act.


  1. Because rational people make decisions by weighing costs and benefits, their decisions may change in response to incentives.


  1. When the price of a good rises, consumers will buy less of it because its cost has risen.


  1. When the price of a good rises, producers will allocate more resources to the production of the good because the benefit from producing the good has risen.


  1. Many public policies change the costs and benefits that people face. Sometimes policymakers fail to understand how policies alter incentives and behavior and a policy may lead to unintended consequences.


  1. Example: Seat belt laws increase the use of seat belts but lower the incentives of individuals to drive safely. This leads to an increase in the number of car accidents. This also leads to an increased risk for pedestrians.


  1. Case Study: The Incentive Effects of Gasoline Prices

III. How People Interact


  1. Principle #5: Trade Can Make Everyone Better Off


  1. Trade is not like a sports contest, where one side gains and the other side loses.


  1. Consider trade that takes place inside your home. Your family is likely to be involved in trade with other families on a daily basis. Most families do not build their own homes, make their own clothes, or grow their own food.


  1. Countries benefit from trading with one another as well.


  1. Trade allows for specialization in products that countries (or families) can do best.


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