Solution Manual for Microeconomics, 17th edition by Christopher T.S. Ragan Complete Verified Chapter's.docx Solution Manual for Microeconomics, 17th edition by Christopher T.S. Ragan Complete Verified Chapter's.docx Solution Manual for Microeconomics, 17th edition by Christopher T.S. Ragan Complete Verified Chapter's.docx

1. Solution Manual For Microeconomics,
17th Canadian Edition,
By Christopher Ragan |Verified Chapters 20

2. Contents
Part One: What Is Economics? 1
Chapter 1: Economic Issues and Concepts 3
Chapter 2: Economic Theories, Data, and Graphs 13
Part Two: An Introduction to Demand and Supply 26
Chapter 3: Demand, Supply, and Price 27
Chapter 4: Elasticity 40
Chapter 5: Price Controls and Market Efficiency 54
Part Three: Consumers and Producers 65
Chapter 6: Consumer Behaviour 66
Chapter 7: Producers in the Short Run 81
Chapter 8: Producers in the Long Run 95
Part Four: Market Structure and Efficiency 104
Chapter 9: Competitive Markets 105
Chapter 10: Monopoly, Cartels, and Price Discrimination 116
Chapter 11: Imperfect Competition and Strategic Behaviour 131
Chapter 12: Economic Efficiency and Public Policy 140
Part Five: Factor Markets 150
Chapter 13: How Factor Markets Work 152
Chapter 14: Labour Markets and Income Inequality 163
Chapter 15: Interest Rates and the Capital Market 175
Part Six: Government in the Market Economy 183
Chapter 16: Market Failures and Government Intervention 185
Chapter 17: The Economics of Environmental Protection 198
Chapter 18: Taxation and Public Expenditure 210
Part Seven: Canada in the Global Economy 219
Chapter 19: The Gains from International Trade 220
Chapter 20: Trade Policy 229

3. Chapter 1: Economic Issues and Concepts iii
List of Boxes
Applying Economic Concepts
1-1 The High Opportunity Cost of Your University Degree 7
1-2 Economics Needs the Other Social Sciences 21
2-1 Where Economists Work 30
2-2 Can Economists Design Controlled Experiments to Test Their Theories? 34
3-1 Demand and Supply Shocks Created by the COVID-19 Pandemic 64
3-2 Why Apples but Not iPhones? 72
4-1 Who Really ―Pays‖ for Payroll Taxes? 93
5-1 Minimum Wages and Unemployment 105
5-2 The Debate Over ―Price Gouging‖: Efficiency Versus Public Virtue 118
6-1 Rationality and Framing in Consumer Behaviour 130
7-1 Is It Socially Responsible to Maximize Profits? 160
7-2 Three Examples of Diminishing Returns 168
7-3 The Digital World: When Diminishing Returns Disappear Altogether 174
8-1 The Significance of Productivity Growth 191
9-1 Why Small Firms Are Price Takers 207
9-2 The Parable of the Seaside Inn 217
10-1 Network Effects as Entry Barriers 239
12-1 Potential Mergers in the Canadian Airline Industry 302
14-1 The Rise of the ―Gig‖ Economy 356
15-1 Inflation and Interest Rates 380
16-1 The World‘s Endangered Fish 398
16-2 Used Cars and the Market for ―Lemons‖ 404
18-1 Using a UBI to Eliminate Poverty 466
19-1 Two Examples of Absolute and Comparative Advantage 484
19-2 Comparative Advantage and Global Supply Chains 492
20-1 Canadian Wine: A Free-Trade Success Story 520
Lessons from History
4-1 Economic Development and Income Elasticities 95
8-1 Jacob Viner and the Clever Draftsman 189
9-1 What Do Whaling Ships and Oil Wells Have in Common? 224
10-1 Disruptive Technologies and Creative Destruction 241
12-1 Are Amazon and Facebook the Standard Oil of the Twenty-First Century? 300
13-1 David Ricardo and ―Economic Rent‖ 327
20-1 Tariff Wars and the Stark Lessons from the Great Depression 508

4. iv Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Extensions in Theory
3-1 The Distinction Between Stocks and Flows 53
11-1 The Prisoners‘ Dilemma 270
16-1 Arthur Okun‘s ―Leaky Bucket‖ 406
18-1 Who Really Pays the Corporate Income Tax? 450
19-1 The Gains from Trade More Generally 482
Part One What
Is Economics?
This opening Part of the book provides an introduction to economics. The central themes of
Chapter 1 are scarcity, choice, opportunity cost, and the self-organizing role of markets. The
chapter also examines the gains from specialization and trade, the role of money, the effects of
globalization, and ends with a discussion of the various types of economic systems. Chapter 2
examines how economists build their models and test their theories. It also addresses central
methodological issues, the most important being the idea that the progress of economics (like
all scientific disciplines) depends on relating our theories to what we observe in the world
around us.Finally, the chapter has an extensive section on graphing.
***
Chapter 1 opens with a brief tour of some key economic issues in Canada and other countries—
from rising protectionism and the dangers of climate change to accelerating technological
changeand growing income inequality. The purpose is to whet the reader‘s appetite for the kinds
of issueseconomists are thinking about today. This offers a natural segue to the discussion of
scarcity, without which few of these issues would be very interesting. The chapter addresses
the fundamental concepts of scarcity, choice, and opportunity cost, illustrating these ideas with
a production possibilities boundary. (It is worth noting that these concepts are relevant to all
economies, whether they are organized by central planning or by free markets.) We then
examine the complexity of modern market economies, examining the decision makers,
production, trade, money, and globalization. Finally, we examine different types of economic
systems, including traditional, command, and free-market systems. We emphasize that all
actual economies are mixtures, containing elements of all three pure systems.
Chapter 2 provides a longer introduction to the methodological issues of economics than is
usually included in introductory texts. We do this because most students believe that the scientific
methodis limited to the natural sciences. But to fully appreciate economics, they must understand that
its theoriesare also open to empirical testing and that these theories continually change as a result of
what the

5. Chapter 1: Economic Issues and Concepts v
empirical evidence shows. We understand that some instructors feel their time is so limited that they
cannot spend class time on Chapter 2. We believe that even if it is not covered in class, students‘
attentionshould be called to the issues addressed in the chapter. Our experience is that students benefit
from some discussion of the scientific method and from the insight that the social sciences are not all
that different from the ―hard‖ sciences, at least in their basic approaches.

6. vi Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
The chapter begins by making the distinction between positive and normative statements. We then
work carefully through the various elements of economic theories, including definitions, assumptions,
and predictions. Testing theories is as important as developing them, so we emphasize the interaction
betweentheorizing and empirical observation. We then present various types of economic data, and this
gets us into a detailed discussion of index numbers, time-series and cross-section data, and graphs. The
final section of the chapter goes through graphing in detail.

7. Chapter 1: Economic Issues and Concepts vii

8. Chapter 1: Economic Issues and Concepts
This chapter is in three main sections, which begins after a brief introductory mention of some key
economic issues of the day. The first substantive section develops the concepts of scarcity, choice, and
opportunity cost. To ensure the student really understands what opportunity cost is all about, we have
a box that examines the opportunity cost of a university or college degree. This should be a familiar
example to which students can easily relate. The production possibilities boundary is then introduced,
andit is shown to embody the three key concepts of scarcity, choice and opportunity cost. Its nature as a
frontier between attainable and unattainable is worth stressing, as is the fact that what is attainable is
itselfsubject to change. Four key economic problems are then discussed, and each one is expressed in
terms of the production possibilities boundary. These questions give the student an inkling of the types
of questions addressed both in microeconomics and in macroeconomics.
The chapter‘s second section examines the complexity of modern economies, asking why the
things we want to purchase are almost always available. What produces this remarkable coordination?
Wediscuss the market as an instrument that brings order to the economy as a whole. Along the way, the
student is introduced to Adam Smith‘s ―invisible hand‖. The section also discusses who makes the many
millions of choices in a market economy, and why incentives matter to the decision-makers. We show
thecircular flow of income and expenditure as a way of showing the interaction between consumers and
producers. We also examine the nature of maximizing decisions (both utility and profit), and the
importance of decisions at the margin. Finally, on the production side, we examine the role of
specialization, the division of labour, globalization, and the importance of money in facilitating trade.
The chapter‘s third and final section deals with comparative economic systems. Students will
readin almost every chapter of this book about a market economy. Contrasting it with planned and
traditional economies is a good way to gain some insight into the concept at the outset. We emphasize
that actual economies are rarely, if ever, well represented by the extremes; instead, actual economies
are mixed economies, with varying degrees of government ownership and planning. Students are
introduced to Karl Marx‘s argument for a centrally planned economy. While Marx had many things right,
we argue that central planning has not been successful in proving itself as an efficient way of organizing
an economy, allocating resources, or generating prosperity for a large fraction of the population. We
have added a new box to this chapter explaining why a thorough understanding of economic
phenomena and economic policy requires drawing insights from the other social sciences.

9. Chapter 3: Demand, Supply, and Priceix
Answers to Study Exercises
Fill-in-the-Blank Questions
Question 1
a) land, labour, capital; factors
b) opportunity cost
c) production possibilities boundary
d) scarcity (because points outside the boundary are unattainable); downward (or negative);
theopportunity cost associated with any choice
e) constant; increasing
f) increases (meaning that more units of good B must be given up to get an extra unit of good A)
Question 2
a) self; self-interest
b) incentives
c) firms; households; governments
d) increase (maximize); increase (maximize)
e) margin; (marginal) cost
Question 3
a) division; specialization
b) trade
c) money
d) globalization

10. x Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Review Questions
Question 4
Any realistic production possibilities boundary displays scarcity, the need for choice, and
opportunity cost.
Scarcity: The production possibilities boundary (PPB) separates attainable combinations of
goods from those that are unattainable. Thus scarcity is shown by the existence of some
unattainable bundles of goods.
Choice: Because of scarcity, societies must somehow choose how resources are to be allocated;
thus a particular point on the PPB must be chosen.
Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is
unavoidable every time a choice is made. For the economy as a whole, the decision to produce
more of one good must involve a decision to produce less of some other good.
Question 5
Consider any country‘s production possibilities boundary, and suppose the two products are X
and Y. A technological improvement in industry X shifts the PPB out (along the X axis),
increasing the maximum amount of X that can be produced. Note that the maximum amount
ofY that can be produced has not changed. But since the PPB has shifted out, there are many
combinations of both goods that are now available that were not before, and some of these
involve producing more of both goods. Thus, even though the technology for producing Y has
not changed, the technological improvement in X does allow the country to choose to produce
more of both products.
Question 6
The central ideas illustrated by the two-good version of the production possibilities boundary (PPB) are
scarcity, choice, and opportunity cost. Exactly the same ideas can be illustrated in a more realistic
three- good version of the model, which is more complicated to draw, or by the much more realistic N-
good version of the model (with N 4), which is impossible to draw. Thus the assumption of only two
goods ismerely a simplifying one: it allows us to easily grasp and illustrate some central points that
would be more difficult to understand in the more general N-good case.
Question 7
a) If all Canadian families had $80,000 of after-tax income (roughly the Canadian average), it would be
difficult to say that real poverty existed in Canada. At this level of income, all families would easily have
enough income to provide the essentials of food, shelter, and clothing, and could also have much
beyondthese essentials. However, there would still be many things that these families could not
afford, such as expensive university education, expensive vacations, a cottage in the country, etc.
Defining poverty withany precision is difficult, and we will say more about this in Chapter 18.

11. Chapter 3: Demand, Supply, and Pricexi
b) Would scarcity exist in such a setting? Yes, certainly. By scarcity we mean simply an excess of wants
over the resources available to satisfy those wants. And scarcity would exist for each of those families
because most (if not all) of them would still desire to have more than they actually had.
c) Scarcity is an excess of wants over the resources available to satisfy those wants. Poverty—at least in
its ―absolute form‖—is concerned with a level of resources below some threshold of sufficiency. One
canconceivably eliminate poverty, as in part (a), but that would not eliminate scarcity.
Question 8
Microeconomics is the study of the allocation of resources within and across individual markets,
and the determination of relative prices and quantities in those specific markets. Little or no
attention is paid to the behaviour of the aggregate economy. Macroeconomics is the study of
the determination of aggregates such as aggregate output, employment, the price level, the
unemployment rate, and the exchange rate. When doing macroeconomics, little or no attention
is paid to what is going on in the individual markets for specific products.
Question 9
In the answers that follow, note that the statements are made ceteris paribus. In other words,
the predicted result of a change in some specific price is made under the assumption that
nothing else changes.
a) As the price of ski-lift tickets rises, you are likely to substitute toward other leisure
activities(whose price has not increased) and thus reduce your purchases of ski-lift tickets.
b) As the hourly wage for your weekend job rises, the opportunity cost of not working rises.
Soyou are more likely than before to decide not to go skiing, and to work instead.
c) As the fine for speeding rises, the cost of being caught speeding clearly increases. The benefit
of driving over the speed limit is presumably unchanged, however. So an increase in the value
ofspeeding tickets is likely to cause you to reduce your speed (and to watch more carefully for
hidden police cars!).
d) The higher the weight placed on the assignment, the greater is the incentive for you to work
hard on that assignment (and thus hopefully receive a higher grade on the assignment and on
the course). This is one obvious reason why professors like to put significant weight on midterm
exams – to get students to work hard early in the course rather than leaving all the work to the
few days before the final exam!
e) As tuition fees for one specific institution increase, you are likely to substitute toward other
institutions whose fees have not increased, and thus reduce your desire to attend the first
institution. (For small changes in tuition fees, this effect may be very small because of the
perceived large differences between some educational institutions.)
Question 10

12. xii Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
There are two reasons why the specialization of labour is more efficient than self-sufficiency.
First, since individual abilities differ, specializing allows each person to focus their energies on
what they do best, leaving everything else to be done by others. As a result, total output will
rise. Second, as people specialize, they often ―learn by doing‖ and become even better at their
specific task. Thus specialization often leads to improvements in ability that would not
otherwise occur.
Question 11
The market for doctors‘ services depends heavily on the specialization of labour. A person with
back pain will not know what is wrong. They go to a general practitioner (GP) who is somewhat
familiar with a broad range of symptoms and illnesses. The GP may rule out the simplest
possiblecauses for the pain, and in the process determine that the patient requires the services
of a specialist who diagnoses and treats the patient‘s back. The patient is referred to this
specialist whomay diagnose a ruptured disk and perform the delicate surgery necessary to solve
the problem. Given this reliance on specialization, the market depends on having relatively
more GPs who see a large number of patients and act as ―gatekeepers‖ for patients to the more
specific specialists.
Question 12
Traditional systems: Behaviour is based primarily on tradition, custom, and habit.
Command systems: Decisions about production and consumption are determined by a central
planning authority.
Free-market systems: Production and consumption decisions are made privately, by
decentralizedproducers and consumers.
Mixed systems: These economic systems contain elements of tradition, command, and free
markets.
Question 13
This quote, if put to a group of students, would stimulate much interesting discussion, not only
about views on how alternative economic systems work, but also about the words used to
describe them. The term planned economy, for example, describes the conscious use of
centralized decisionmaking for key economic decisions, but the results of that process often look
anything but planned,with shortages in some sectors, surpluses in others, and often a rather
dispirited and unmotivated private sector. On the other hand, the unplanned decentralized
market economy––though surely not perfect––creates a much more orderly looking set of
outcomes.
Problems
Question 14

13. Chapter 3: Demand, Supply, and Price xiii
In general, the opportunity cost (measured in dollars) for any activity includes three things:
 the direct (dollar) cost of the activity, plus
 the dollar value of whatever you give up in order to do the activity, minus
 whatever dollar ―savings‖ the activity generates
In this case, the direct cost of transportation, lift tickets and accommodation of $300 is
definitely included. The income of $120 that you give up also counts. Finally, we must deal with
the restaurant meals of $75. Surely you would have eaten some food even if you hadn‘t gone
skiing, so the full $75 is not included. But given the relatively high price of restaurant meals
comparedto buying your own groceries, you will probably include most of the $75. Thus the
opportunity cost of the ski trip is $420 plus some (large) fraction of the $75.
Question 15
a) The budget line is shown below. If all $240,000 is spent on ATVs, you could purchase 30 of
them; if all the money is spent on snowmobiles, you could purchase 20 of them. The downward
sloping line divides the attainable from the unattainable combinations of ATVs and
snowmobiles.
b) The opportunity cost of one ATV is the number of snowmobiles that must be given up to
purchase an additional ATV. Since each ATV costs $8000 and each snowmobile costs $12000,
the opportunity cost of one ATV is 2/3 of a snowmobile.
c) The opportunity cost of one snowmobile is the number of ATVs that must be given up to
purchase an additional snowmobile. It is equal to 1.5 ATVs. Note that the opportunity cost of an
ATV (in terms of forgone snowmobiles) is the inverse of the opportunity cost of a snowmobile
(in terms of forgone ATVs).
d) In this case, the prices of ATVs and snowmobiles are independent of how many are
purchased. This fact is reflected by the budget line being linear (of constant slope). So both
ofthe opportunity costs are independent of how many are purchased.
Question 16

14. xiv Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
In each scenario, one could choose to plot the production possibilities boundary, where the two
numbers provided are the two intercepts along the two axes. The slope of the boundary would
show the opportunity cost of each door (or each window). Alternatively, one can compare the
two maximum values, as provided in the question.
a) The factory could produce either 1000 windows or 250 doors (or many intermediate
combinations). In order to produce one extra door, it must give up 4 (=1000/250) windows. In
other words, the opportunity cost of one extra door is 4 windows.
b) The opportunity cost of one extra door is 1 window (=500/500).
c) The opportunity cost of one extra door is 3 windows (=1200/400).
d) The opportunity cost of one extra door is 1.35 windows (=942/697).
e) The opportunity cost of one extra door is 1.33 windows (=600/450).
Question 17
This question is good for forcing students to think through the computation of opportunity cost
and also in showing how the allocation of labour in particular ways can maximize total output.
a) You can catch 6 fish or collect 3 bundles of firewood in one day‘s work. Thus, your
opportunity cost of one additional bundle of firewood is 2 fish (6/3 = 2). For your friend, the
opportunity cost of one additional bundle of firewood is 4 fish (8/2 = 4).
b) To allocate tasks in the output-maximizing way, each person should do the task for which
they have the lower opportunity cost. You have the lower opportunity cost of collecting
firewood. Your friend has the lower opportunity cost of catching fish (0.25 of a bundle for your
friend as compared to 0.5 of a bundle for you). So for the two of you to collectively maximize
output you should specialize in collecting firewood and your friend should specialize in catching
fish.
c) What is the total amount of output after two days, if you allocate labour as in part (b)? In
two days, you would collect 6 bundles of firewood and your friend would catch 16 fish. The
reverse pattern of specialization would yield only 4 bundles of firewood and 12 fish, which is
clearly inferior.
Question 18
a) At point a, 2.5 tonnes of clothing and 3 tonnes of food are being produced per year. At point
b, annual production is 2.5 tonnes of clothing and 7 tonnes of food. At point c, annual
production is
6.5 tonnes of clothing and 3 tonnes of food.
b) At point a the economy is either using its resources inefficiently or it is not using all of its
available resources. Point b and c represent full and efficient use of available resources because
they are on the PPB.

15. Chapter 3: Demand, Supply, and Price xv
c) At point b, the opportunity cost of producing one more tonne of food (and increase from 7 to
8)is the 2.5 tonnes of clothing that must be given up. The opportunity cost of producing one
more tonne of clothing (from 2.5 to 3.5) appears, from the graph, to be approximately 0.75
tonnes of food that must be given up (from 7.0 to about 6.25).
d) Point d is unattainable given the economy‘s current technology and resources. Point d can
become attainable with a sufficient improvement in technology or increase in available
resources.
Question 19
a) As the table shows, there are only 250 workers in Choiceland, and to construct the production
possibilities boundary (PPB) we must imagine all the combinations of workers in each sector. Using the
two middle columns from the table, we can plot the output levels on a graph to get the following PPB:
b) If the economy is already producing 45 units of X and 900 units of Y, then 15 extra units of X
can only be produced by reducing the production of Y by 300 units. The opportunity cost of
15 units of X is therefore 300 units of Y (or 300/15 = 20 units of Y per unit of X). If the economy
is already producing 60 units of X (and 600 units of Y), the opportunity cost of producing an
additional 15 units of X is the full 600 units of Y that must be given up. This implies an
opportunity cost of 600/15 = 40 units of Y per extra unit of X. Thus, we see that the opportunity
cost of X rises when more of X is already being produced.
c) If the economy is producing 40 units of X and 600 units of Y, then either some resources are
not being used or they are being used inefficiently; the economy is operating inside the
production possibilities boundary. It would thus be possible to improve the use of resources
and increase output of X by 20 units without reducing the output of Y at all. In this sense, the
extra output of X has no opportunity cost in terms of forgone units of Y.
d) If any given amount of labour can now produce 10 percent more of good Y, then the PPB
shifts up in a particular way. Specifically, the Y values increase by 10 percent for any given X
value, as shown below.

16. xvi Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Question 20
a) It doesn‘t matter how the two axes are labelled in this case; just label them X and Y. The long
civil war destroys much of the country‘s infrastructure and likely reduces the country‘s ability to
produce all products. So the PPB shifts inwards, as shown below in part (a) of the figure.
b) The axes are now labelled Food and Clothing. The new technology doubles the maximum
amount of food that can be produced, and so shifts the PPB outward in the manner shown in
part (b) of the figure. Note that the vertical intercept (maximum amount of clothing) does not
change.
c) The axes are again labelled Food and Clothing, as in part (c). In this situation, the earthquake
destroys many clothing factories and so shifts the PPB inward, reducing the maximum possible
amount of clothing (but leaving unaffected the maximum possible amount of food).
d) The axes are labelled X and Y, as shown in part (d) of the figure. The immigration increases
the labour force and increases the country‘s ability to produce all products. The PPB shifts
outward, increasing the maximum possible amounts of both X and Y. Since the new level of
immigration is occurring each year, every year will see such an outward shift in the PPB.

17. Chapter 3: Demand, Supply, and Price xvii
*****
Chapter 2: Economic Theories, Data, and Graphs
This chapter provides an introduction to the methods economists use in their research. We integrate a
detailed discussion of graphing into our discussion of how economists present economic data and how
they test economic theories.
In our experience, students typically do not learn enough about the connection between theory
and evidence, and how both are central to understanding economic phenomena. We therefore
recommendthat considerable emphasis be placed on Figure 2-1, illustrating the process of going from
model buildingto generating hypotheses to confronting data and testing hypotheses, and then returning
to model building(or rebuilding). There is no real beginning or end to this process, so it is difficult to call
economics an entirely ―theory driven‖ or ―data driven‖ discipline. Without the theoryand models, we
don‘t know what to look for in the data; but without analyzing the data from the world around us, we
can‘t build sensible models of human behaviour and interaction through markets. The scientific
approach in economics, as in the ―hard‖ sciences, involves a close relationship between theory and
evidence.
***
The chapter is divided into four major sections. In the first section, we make the
importantdistinction between positive and normative statements and advice. Students must
understand this

18. xviiiInstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
distinction, and that the progress of any scientific discipline relies on researchers‘ ability to
separate what evidence suggests is true from what they would like to be true. We conclude this
section by explaining why economists are often seen to disagree even though there is a great
deal of agreement among them on many specific issues. This leads to a box on where
economists typically get jobs and the kind of work they often do.
The second section explains the elements of economic theories and how they are
tested. We emphasise how a theory‘s or model‘s definitions and assumptions lead, through a
process of logical deduction, to a set of conditional predictions. We then examine the testing of
theories. It is here that we focus on the interaction of theory and empirical observation (Figure
2-1). We emphasize the importance of the distinction between correlation and causation, with
a simple example. We have added a new box at this point on the growing use of randomized
control trials (RCTs) in testing economic hypotheses, and some of the limitations encountered
with this empirical approach.
The chapter‘s third section deals with economic data. We begin by explaining the construction
ofindex numbers, and we use them to compare the volatility of two sample time series. Index numbers
are so pervasive in discussions of economic magnitudes that students must know what these are and
how theyare constructed. We then make the distinction between cross-sectional and time-series data,
and at this point students are introduced to two types of graph.
This brings us to the chapter‘s final section, on graphing. We show how a relation can be
expressed in words, in a table, in an equation, or on a graph. We then go into considerable detail on
linear functions, slope, non-linear functions, and functions with minima and maxima. In this discussion,
the student is introduced to the concept of the margin, described as the change in Y in response to a
one-unit change in X. In all cases, the graphs apply to real-world situations rather than abstract
variables. Pollutionabatement, hockey-stick production, firm profits, and fuel consumption are our main
examples.
Answers to Study Exercises
Fill-in-the-Blank Questions
Question 1
a) models (or theories)
b) endogenous; exogenous
c) (conditional) prediction; empirical
d) (positively) correlated; causal
e) self-interest; utility; profits
Question 2
a) index; relative
b) absolute value of the price; absolute value of the price
c) cross-section

19. Chapter 3: Demand, Supply, and Price xix
d) scatter
e) time-series
Question 3
a)
b) 500; positively; 4
c) 12; negatively; −0.2
d) tangent
e) zero; zero
Review Questions
Question 4
a) normative (―The government should impose…‖ is inherently a value judgement.)
b) positive (In principle, we could determine the impact that foreign aid actually has.)
c) positive (In principle, we could determine the extent to which fee increases affect access.)
d) normative (What is or is not unfair is clearly based on a value judgement.)
e) normative (Use of the expression ―too much‖ is a value judgement.)
f) normative (Use of the word ―should‖ in this sentence makes it a value judgement.)
Question 5
a) In the Canadian wheat sector, the amount of rainfall on the Canadian prairies is an
exogenousvariable; the amount of wheat produced is an endogenous variable.
b) To the Canadian market for coffee, the world price of coffee is exogenous; the price of a
cupof coffee at Tim Horton‘s is endogenous.
c) To any individual student, the widespread unavailability of student loans is exogenous;
theirown attendance at university or college is endogenous.
d) To any individual driver, the tax on gasoline is exogenous; his or her own decision regarding
which vehicle to purchase is endogenous.
Question 6

20. xx Instructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
The observed correlation cannot lead to a certain inference about causality. It is consistent with
the theory that the increase in demand for homes leads to an increase in the price of lumber
(which is generally a pretty sensible theory!), but it is also consistent with a different theory—
one in which some unobserved factor leads to both the increase in demand for homes and
separately to the increase in the price of lumber. Correlation does not imply causality!

21. Chapter 3: Demand, Supply, and Price xxi
Problems
Question 7
a) Using 2009 as the base year means that we choose $85 as the base price. We thus divide the
actual prices in all years by $85 and then multiply by 100. In this way, we will determine, in
percentage terms, how prices in other years differ from prices in 2009. The index values are as
follows:
Year Price ($) Physics textbook price index
2009 85 = 100
2010 87 100 = 102.4
2011 94 100 = 110.6
2012 104 100 = 122.4
2013 110 100 = 129.4
2014 112 100 = 131.8
2015 120 100 = 141.2
2016 125 100 = 147.1
2017 127 100 = 149.4
2018 127 100 = 149.4
2019 130 (130/85) × 100 = 152.9
b) The price index in 2014 is 131.8, meaning that the price of the physics textbook is 31.8
percent higher in 2014 than in the base year, 2009.
c) From 2016 to 2019, the price index increases from 147.1 to this is not an increase
of 5.8 percent. The percentage increase in the price index from 2016 to 2019 is equal to [(152.9
− 147.1) / 147.1] × 100 = 3.94 percent.
d) These are time-series data because the data are for the same product at the same place but
at different points in time.

22. xxiiInstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Question 8
a) Using Calgary as the ―base university‖ means that we choose $6.25 as the base price. Thus
we divide all actual prices by $6.25 and then multiply by 100. In this way, we will determine, in
percentage terms, how prices at other universities differ from Calgary prices. The index values
are as follows:
University Price per pizza Index of pizza prices
Dalhousie $6.50 100 = 104
Laval 5.95 (5.95/6.25) = 95.2
McGill 6.00 100 = 96
Queen‘s 8.00 100 = 128
Waterloo 7.50 100 = 120
Manitoba 5.50 100 = 88
Saskatchewan 5.75 100 = 92
Calgary 6.25 100 = 100
UBC 7.25 100 = 116
Victoria 7.00 100 = 112
b) The university with the most expensive pizza is Queen‘s, at $8.00 per pizza. The index value
for Queen‘s is 128, indicating that pizza there is 28 percent more expensive than at Calgary.
c) The university with the least expensive pizza is Manitoba, at $5.50 per pizza. The index value
for Manitoba is 88, indicating that the price of pizza there is only 88 percent of the price at
Calgary. It is therefore 12 percent cheaper than at Calgary.
d) These are cross-sectional data. The variable is the price of pizza, collected at different places
at a given point in time (March 1, 2022). If the data had been the prices of pizza at a single
university at various points in time, they would be time-series data.

23. Chapter 3: Demand, Supply, and Pricexxiii
Question 9
a) Using 2014 as the base year for an index number requires that we divide the value of exports
(and imports) in each year by the value in 2014, and then multiply the result by 100. This is
done in the table below.
Year Exports Export Index Imports Import Index
2014 11794 (11794/11794)(100) = 100 3264 (3264/3264)(100) = 100
2015 12210 (12210/11794)(100) = 103.5 3455 (3455/3264)(100) = 105.9
2016 12552 (12552/11794)(100) = 106.4 3651 (3651/3264)(100) = 111.9
2017 13252 (13252/11794)(100) = 112.4 3916 (3916/3264)(100) = 120.0
2018 13756 (13756/11794)(100) = 116.6 4003 (4003/3264)(100) = 122.6
b) It appears that imports were a little more volatile over this period than exports—or at least
they grew faster than did exports. Both imports and exports grew in each year, and did not
decline at all during this period, so ―volatile‖ does not really apply.
c) The index number for exports increased from 100 to 116.6 between 2014 and 2018, so
exportsgrew by 16.6 percent. Imports grew by 22.6 percent over the same period.
Question 10
This is a good question to make sure students understand the importance of using
weightedaverages rather than simple averages in some situations.
a) The simple average of the three regional unemployment rates is equal to (5.5 + 7.2 + 12.5)/3 =
8.4. Is 8.4% the ―right‖ unemployment rate for the country as a whole? The answer is no
because this simple, unweighted (or, more correctly, equally weighted) average does not
account for the fact that the Centre is much larger in terms of the labour force than either the
West or East, and thus should be given more weight than the other two regions.
b) To solve this problem, we construct a weighted average unemployment rate. We do so by
constructing a weight for each region equal to that region‘s share in the total labour force.
From the data provided, the country‘s total labour force is 17.2 million (5.3 + 8.4 + 3.5). The
three weights are therefore:
West: weight = 5.3/17.2 = 0.308
Centre:weight = 8.4/17.2 = 0.488
East: weight = 3.5/17.2 = 0.203

24. xxivInstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
These weights should sum exactly to 1.0, but due to rounding they do not quite do so. Using
these weights, we now construct the average unemployment rate as the weighted sum of the
threeregional unemployment rates.
Canadian weighted unemployment rate = (.308 5.5) + (.488 7.2) + (.203 12.5) = 7.75
This is a better measure of the Canadian unemployment rate because it correctly weights each
region‘s influence in the national total. Keep in mind, however, that for many situations the
relevant unemployment rate for an individual or a firm may be the more local one rather than
the national average.
Question 11
a) These data are best illustrated with a time-series graph, with the month shown on
thehorizontal axis and the exchange rate shown on the vertical axis.

25. Chapter 3: Demand, Supply, and Pricexxv
b) These cross-sectional data are best illustrated with a bar chart.
c) These cross-sectional data are best illustrated in a scatter diagram; the ―line of best fit‖
is clearly upward sloping, indicating a positive relationship between average investment rates
and average growth rates.

26. xxviInstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Question 12
a) Along Line A, Y falls as X rises; thus the slope of Line A is negative. For Line B, the value of
Y rises as X rises; thus the slope of Line B is positive.
b) Along Line A, the change in Y is –4 when the change in X is 6. Thus the slope of Line A is
ΔY/ΔX = −4/6 = −2/3. The equation for Line A is:
Y = 4 – (2/3)X
c) Along Line B, the change in Y is 7 when the change in X is 6. Thus the slope of Line B is ΔY/ΔX
= 7/6. The equation for Line B is:
Y = 0 + (7/6)X
Question 13
Given the tax-revenue function T = 10 + .25Y, the plotted curve will have a vertical intercept of
10 and a slope of 0.25. The interpretation is that when Y is zero, tax revenue will be $10 billion.
And for every increase in Y of $100 billion, tax revenue will rise by $25 billion. The diagram is
as shown below:
Question 14
a) The slope of the straight line connecting two points is equal to the change in Y between the
points divided by the change in X between the points. In this case, the change in Y from the first
point to the second is 3; the change in X is 9. Thus the slope of the straight line is 3/9 = 1/3.
b) From point A to point B, the change in Y is 20 and the change in X is −10. Thus the slope of
the straight line is −20/10 = −2.

27. Chapter 3: Demand, Supply, and Pricexxvii
c) The slope of the function is the change in Y brought about by a one-unit change in X, which is
given by the coefficient on X, −0.5.
d) The slope of the function is the change in Y brought about by a one-unit change in X, which is
given by the coefficient on X, 6.5.
e) The slope of the function is the change in Y brought about by a one-unit change in X, which
is given by the coefficient on X, 3.2.
f) The Y intercept of a function is the value of Y when X equals 0. In this case the Y intercept is
1000.
g) The Y intercept of a function is the value of Y when X equals 0. In this case the Y intercept is
−100.
h) The X intercept ofa function (if it exists) is the value of X when Y equals 0. In this case, when Y
equals 0 we have the equation 0 =10 – 0.1X which yields −10 = −0.1X which gives us X = 100.
Question 15
Let A be the firm‘s annual spending on advertising and let R be the firm‘s annual revenues. The
equation for advertising (A) as a function of revenues (R) is A = 100,000 + (0.15)R.
Question 16
a) For each relation, plot the values of Y for each value of X. Construct the following table:
(i) Y = 50 + 2X (ii) Y = 50 + 2X + .05X2 (iii) Y = 50 + 2X − .05X2
X Y X Y X Y
0 50 0 50 0 50
10 70 10 75 10 65
20 90 20 110 20 70
30 110 30 155 30 65
40 130 40 210 40 50
50 150 50 275 50 25

28. xxviiIinstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
Now plot these values on scale diagrams, as shown below. Notice the different vertical scale
onthe three different diagrams.
b) For part (i), the slope is positive and constant and equal to 2. For each 10-unit increase in X,
there is an increase in Y of 20 units. For part (ii), the slope is always positive since an increase in
X always leads to an increase in Y. But the slope is not constant. As the value of X increases, the
slope of the line also increases. For part (iii), the slope is positive at low levels of X. But the
function reaches a maximum at X=20, after which the slope becomes negative. Furthermore,
when X is greater than 20, the slope of the line becomes more negative (steeper) as the value
of Xincreases.
c) For part (i), the marginal response of Y to a change in X is constant and equal to 2. This is the
slope of the line. In part (ii), the marginal response of Y to a change in X is always positive, but
the marginal response increases as the value of X increases. This is why the line gets steeper as
X increases. For part (iii), the marginal response of Y to a change in X is positive at low levels of
X. But after X=20, the marginal response becomes negative. Hence the slope of the line
switches from positive to negative. Note that for values of X further away from X=20, the
marginal response of Y to a change in X is larger in absolute value. That is, the curve flattens out
as we approach X=20 and becomes steeper as we move away (in either direction) from X=20.

29. Chapter 3: Demand, Supply, and Pricexxix
Question 17
Thefour scalediagrams areshownonthe next page, each with different verticalscales. In eachcase, the
slopeof the line is equal to Y/ X, which is often referred to as ―the rise over the run‖—the amount by
which Y changes when X increases by one unit. (For those students who know calculus, the slope of
each curve isalso equal to the derivative of Y with respect to X, which for these curves is given by the
coefficient on Xin each equation.)
Question 18
The six required diagrams are shown below. Note that we have not provided specific units on
theaxes. For the first three figures, the tax system provides good examples. In each case, think
of earned income as being shown along the horizontal axis and taxes paid shown along the
vertical axis. The first diagram might show a progressive income-tax system where the marginal
tax rate rises as income rises. The second diagram shows a proportional system with a constant
marginal tax rate. The third diagram shows marginal tax rates falling as income rises, even
though total taxpaid still rises as income rises.

30. xxviiIinstructor‘s Solutions Manual for Ragan, Microeconomics, Seventeenth Canadian Edition
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