INSTRUCTOR’S SOLUTIONS
MANUAL
for
Microeconomics
Eighteenth Canadian Edition
Christopher T. S. Ragan
McGill University
Contents
Part One What Is Economics?
Chapter 1 Economic Issues and Concepts ......................................................2
Chapter 2 Economic Theories, Data, and Graphs .......................................13
Part Two An Introduction to Demand and Supply
Chapter 3 Demand, Supply, and Price ..........................................................25
Copyright © 2026 Pearson Canada Inc.
,2 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
Chapter 4 Elasticity ......................................................................................38
Chapter 5 Price Controls and Market Efficiency..........................................52
Part Three Consumers and Producers
Chapter 6 Consumer Behaviour ...................................................................62
Chapter 7 Producers in the Short Run ..........................................................79
Chapter 8 Producers in the Long Run ..........................................................92
Part Four Market Structure and Efficiency
Chapter 9 Competitive Markets ..................................................................101
Chapter 10 Monopoly, Cartels, and Price Discrimination............................114
Chapter 11 Imperfect Competition and Strategic Behaviour .......................128
Chapter 12 Economic Efficiency and Public Policy ....................................140
Part Five Factor Markets
Chapter 13 How Factor Markets Work ........................................................150
Chapter 14 Labour Markets and Income Inequality .....................................162
Chapter 15 Interest Rates and the Capital Market ........................................174
Part Six Government in the Market Economy
Chapter 16 Market Failures and Government Intervention ..........................182
Chapter 17 The Economics of Environmental Protection ............................195
Chapter 18 Taxation and Public Expenditure ...............................................207
Part Seven Canada in the Global Economy
Chapter 19 The Gains from International Trade ..........................................217
Chapter 20 Trade Policy ...............................................................................227
Copyright © 2026 Pearson Canada Inc.
, CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS 3
List of Boxes
Applying Economic Concepts
1-1 The High Opportunity Cost of Your University Degree 8
1-2 Economics Needs the Other Social Sciences 23
2-1 Where Economists Work 32
2-2 Can Economists Design Controlled Experiments to Test Their Theories? 36
3-1 Demand and Supply Shocks Created by the COVID-19 Pandemic 66
3-2 Why Apples but Not iPhones? 74
4-1 Who Really ―Pays‖ for Payroll Taxes? 95
5-1 Minimum Wages and Unemployment 107
5-2 The Debate over ―Price Gouging‖: Efficiency Versus Public Virtue 120
6-1 Rationality and Framing in Consumer Behaviour 134
7-1 Is It Socially Responsible to Maximize Profits? 162
7-2 Three Examples of Diminishing Returns 171
7-3 The Digital World: When Diminishing Returns Disappear Altogether 177
8-1 Is Canada Falling Behind? 196
8-2 Computers, the Internet, and the Productivity Paradox 198
9-1 Why Small Firms Are Price Takers 212
9-2 The Parable of the Seaside Inn 222
10-1 Network Effects as Entry Barriers 245
13-1 Is Greater Immigration a Solution for ―Labour Shortages‖? 340
14-1 A Century of Legislated Discrimination of Indigenous Peoples 354
15-1 Inflation and Interest Rates 395
15-2 Canada’s Housing Affordability Crisis 400
16-1 The World’s Endangered Fish 416
16-2 Used Cars and the Market for ―Lemons‖ 422
18-1 Using a UBI to Eliminate Poverty 486
19-1 Two Examples of Absolute and Comparative Advantage 506
19-2 Comparative Advantage and Global Supply Chains 514
20-1 Tensions Between Supply Management and Freer Trade 538
Lessons from History
4-1 Economic Development and Income Elasticities 97
8-1 Jacob Viner and the Clever Draftsman 193
9-1 What Do Whaling Ships and Oil Wells Have in Common? 230
10-1 Disruptive Technologies and Creative Destruction 247
12-1 Are Amazon and Facebook the Standard Oil of the Twenty-First Century? 310
13-1 David Ricardo and ―Economic Rent‖ 337
20-1 Tariff Wars and the Stark Lessons from the Great Depression 532
20-2 Canadian Wine: A Free-Trade Success Story 545
Copyright © 2026 Pearson Canada Inc.
,4 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
Extensions in Theory
3-1 The Distinction Between Stocks and Flows 55
11-1 The Prisoners’ Dilemma 278
16-1 Arthur Okun’s ―Leaky Bucket‖ 424
18-1 Who Really Pays the Corporate Income Tax? 470
19-1 The Gains from Trade More Generally 504
____________________________________
____
Part One
What Is Economics?
____________________________________
____
This opening Part of the book is 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 as a discipline (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 house prices and the dangers of climate
change to accelerating technological change and
growing income inequality. The purpose is to whet
the reader‘s appetite for the kinds of issues
economists are thinking about today. This offers a
Copyright © 2026 Pearson Canada Inc.
, CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS 5
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 method is
limited to the natural sciences. But
to fully appreciate economics, they
must understand that its theories
are also open to empirical testing
and that these theories continually
change as a result of what the
empirical evidence shows. We
Copyright © 2026 Pearson Canada Inc.
, 6 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
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’ attention
should 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.
Copyright © 2026 Pearson Canada Inc.
MANUAL
for
Microeconomics
Eighteenth Canadian Edition
Christopher T. S. Ragan
McGill University
Contents
Part One What Is Economics?
Chapter 1 Economic Issues and Concepts ......................................................2
Chapter 2 Economic Theories, Data, and Graphs .......................................13
Part Two An Introduction to Demand and Supply
Chapter 3 Demand, Supply, and Price ..........................................................25
Copyright © 2026 Pearson Canada Inc.
,2 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
Chapter 4 Elasticity ......................................................................................38
Chapter 5 Price Controls and Market Efficiency..........................................52
Part Three Consumers and Producers
Chapter 6 Consumer Behaviour ...................................................................62
Chapter 7 Producers in the Short Run ..........................................................79
Chapter 8 Producers in the Long Run ..........................................................92
Part Four Market Structure and Efficiency
Chapter 9 Competitive Markets ..................................................................101
Chapter 10 Monopoly, Cartels, and Price Discrimination............................114
Chapter 11 Imperfect Competition and Strategic Behaviour .......................128
Chapter 12 Economic Efficiency and Public Policy ....................................140
Part Five Factor Markets
Chapter 13 How Factor Markets Work ........................................................150
Chapter 14 Labour Markets and Income Inequality .....................................162
Chapter 15 Interest Rates and the Capital Market ........................................174
Part Six Government in the Market Economy
Chapter 16 Market Failures and Government Intervention ..........................182
Chapter 17 The Economics of Environmental Protection ............................195
Chapter 18 Taxation and Public Expenditure ...............................................207
Part Seven Canada in the Global Economy
Chapter 19 The Gains from International Trade ..........................................217
Chapter 20 Trade Policy ...............................................................................227
Copyright © 2026 Pearson Canada Inc.
, CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS 3
List of Boxes
Applying Economic Concepts
1-1 The High Opportunity Cost of Your University Degree 8
1-2 Economics Needs the Other Social Sciences 23
2-1 Where Economists Work 32
2-2 Can Economists Design Controlled Experiments to Test Their Theories? 36
3-1 Demand and Supply Shocks Created by the COVID-19 Pandemic 66
3-2 Why Apples but Not iPhones? 74
4-1 Who Really ―Pays‖ for Payroll Taxes? 95
5-1 Minimum Wages and Unemployment 107
5-2 The Debate over ―Price Gouging‖: Efficiency Versus Public Virtue 120
6-1 Rationality and Framing in Consumer Behaviour 134
7-1 Is It Socially Responsible to Maximize Profits? 162
7-2 Three Examples of Diminishing Returns 171
7-3 The Digital World: When Diminishing Returns Disappear Altogether 177
8-1 Is Canada Falling Behind? 196
8-2 Computers, the Internet, and the Productivity Paradox 198
9-1 Why Small Firms Are Price Takers 212
9-2 The Parable of the Seaside Inn 222
10-1 Network Effects as Entry Barriers 245
13-1 Is Greater Immigration a Solution for ―Labour Shortages‖? 340
14-1 A Century of Legislated Discrimination of Indigenous Peoples 354
15-1 Inflation and Interest Rates 395
15-2 Canada’s Housing Affordability Crisis 400
16-1 The World’s Endangered Fish 416
16-2 Used Cars and the Market for ―Lemons‖ 422
18-1 Using a UBI to Eliminate Poverty 486
19-1 Two Examples of Absolute and Comparative Advantage 506
19-2 Comparative Advantage and Global Supply Chains 514
20-1 Tensions Between Supply Management and Freer Trade 538
Lessons from History
4-1 Economic Development and Income Elasticities 97
8-1 Jacob Viner and the Clever Draftsman 193
9-1 What Do Whaling Ships and Oil Wells Have in Common? 230
10-1 Disruptive Technologies and Creative Destruction 247
12-1 Are Amazon and Facebook the Standard Oil of the Twenty-First Century? 310
13-1 David Ricardo and ―Economic Rent‖ 337
20-1 Tariff Wars and the Stark Lessons from the Great Depression 532
20-2 Canadian Wine: A Free-Trade Success Story 545
Copyright © 2026 Pearson Canada Inc.
,4 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
Extensions in Theory
3-1 The Distinction Between Stocks and Flows 55
11-1 The Prisoners’ Dilemma 278
16-1 Arthur Okun’s ―Leaky Bucket‖ 424
18-1 Who Really Pays the Corporate Income Tax? 470
19-1 The Gains from Trade More Generally 504
____________________________________
____
Part One
What Is Economics?
____________________________________
____
This opening Part of the book is 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 as a discipline (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 house prices and the dangers of climate
change to accelerating technological change and
growing income inequality. The purpose is to whet
the reader‘s appetite for the kinds of issues
economists are thinking about today. This offers a
Copyright © 2026 Pearson Canada Inc.
, CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS 5
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 method is
limited to the natural sciences. But
to fully appreciate economics, they
must understand that its theories
are also open to empirical testing
and that these theories continually
change as a result of what the
empirical evidence shows. We
Copyright © 2026 Pearson Canada Inc.
, 6 CHAPTER 1: ECONOMIC ISSUES AND CONCEPTS
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’ attention
should 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.
Copyright © 2026 Pearson Canada Inc.
