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1. In each of the following situations, identify which of the twelve principles is at work.
a. You choose to shop at the local discount store rather than paying a higher price
for the same merchandise at the local department store.
b. On your spring break trip, your budget is limited to $35 a day.
e. You buy a used textbook from your roommate. Your roommate uses the money to
buy songs from iTunes.
f. You decide how many cups of coffee to have when studying the night before an
exam by considering how much more work you can do by having another cup ver-
sus how jittery it will make you feel.
g. There is limited lab space available to do the project required in Chemistry 101.
The lab supervisor assigns lab time to each student based on when that student is
able to come.
1. a. People usually exploit opportunities to make themselves better off. In this case,
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d. Overall spending sometimes gets out of line with the economy’s productive capac-
ity. The spending by St. Crispin homeowners on building materials and workers
fell short of the economy’s ability to produce those goods and services. As a result,
prices on the island rose across the board (inflation).
i. Markets move toward equilibrium. Any bicycle a buyer chooses will leave him or
her equally well off. That is, a buyer who chooses a particular bicycle cannot change
actions and find another bicycle that makes him or her better off. Also, no seller
can take a different action that makes him or her better off: no seller can charge a
higher price for a bicycle of similar quality, since no one would buy that bicycle.
2. Describe some of the opportunity costs when you decide to do the following.
a. Attend college instead of taking a job
2. a. One of the opportunity costs of going to college is not being able to take a job.
By choosing to go to college, you give up the income you would have earned on
the job and the valuable on – the – job experience you would have acquired. Another
opportunity cost of going to college is the cost of tuition, books, supplies, and so
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3. Liza needs to buy a textbook for the next economics class. The price at the college
bookstore is $65. One online site offers it for $55 and another site, for $57. All
prices include sales tax. The accompanying table indicates the typical shipping and
handling charges for the textbook ordered online.
options the student will choose?
3. a. The opportunity cost of buying on line is whatever you must give up to get the
b. Below is a list of all of Liza’s options and their purely monetary costs:
Buy from bookstore $65
Buy from first site (price $55), 1-day delivery $55 + $13.98 = $68.98
Buy from first site (price $55), 2-day delivery $55 + $08.98 = $63.98
4. Use the concept of opportunity cost to explain the following.
a. More people choose to get graduate degrees when the job market is poor.
b. More people choose to do their own home repairs when the economy is slow and
hourly wages are down.
Shipping Delivery
method time Charge
Standard shipping 3–7 days $3.99
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4. a. The worse the job market, the lower the opportunity cost of getting a graduate
degree. One of the opportunity costs of going to graduate school is not being able
to work. But if the job market is bad, the salary you can expect to earn is low or
you might be unemployed—so the opportunity cost of going to school is also low.
5. In the following examples, state how you would use the principle of marginal analy-
sis to make a decision.
a. Deciding how many days to wait before doing your laundry
5. a. Each day that you wait to do your laundry imposes a cost: you have fewer clean
clothes to choose from. But each day that you wait also confers a benefit: you can
spend your time doing other things. You will wait another day to do your laundry
if the benefit of waiting to do the laundry that day is greater than the cost.
6. This morning you made the following individual choices: you bought a bagel and
coffee at the local café, you drove to school in your car during rush hour, and you
typed your roommate’s term paper because you are a fast typist—in return for which
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6. When you bought the bagel and coffee, you paid a price for them. You would not
have bought that breakfast if your enjoyment of it (your welfare) had not been great-
er than the price you paid. Similarly, the café owner would not have sold you the
bagel and coffee if the price he received from you were less than the cost to him of
7. The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy
family lives on the west side. Each family’s diet consists of fried chicken and corn –
7. a. Gains from trade usually arise from specialization. If the Hatfields (compared
to the McCoys) are better at raising chickens and the McCoys (compared to the
8. Which of the following situations describes an equilibrium? Which does not? If the
situation does not describe an equilibrium, what would an equilibrium look like?
a. Many people regularly commute from the suburbs to downtown Pleasantville. Due
to traffic congestion, the trip takes 30 minutes when you travel by highway but
8. a. This is not an equilibrium. Assume that all people care about is the travel time to
work (not, for instance, how many turns they need to make or what the scenery
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b. This might be an equilibrium. Those who buy gas at the first station would be
worse off by buying gas at the second if the value of their time spent waiting
exceeded the savings at the pump: they would save 15 cents per gallon but would
9. In each of the following cases, explain whether you think the situation is efficient or
not. If it is not efficient, why not? What actions would make the situation efficient?
a. Electricity is included in the rent at your dorm. Some residents in your dorm leave
lights, computers, and appliances on when they are not in their rooms.
9. a. This is not efficient. If the lights were turned off, some students could be made
better off without making other students worse off because the college would save
money on electricity that it could spend on student programs. By leaving lights
and appliances on when leaving their rooms, residents do not take into account
10. Discuss the efficiency and equity implications of each of the following policies. How
would you go about balancing the concerns of equity and efficiency in these areas?
a. The government pays the full tuition for every college student to study whatever
subject he or she wishes.
b. When people lose their jobs, the government provides unemployment benefits
until they find new ones.
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10. a. Although this policy is equitable, it may not be efficient, depending on the benefi-
cial side effects of education. It does allow everyone, regardless of ability to pay, to
attend college. But it may not be efficient: subsidizing the full cost of tuition for
everyone lowers the opportunity cost of going to college, and this might lead some
11. Governments often adopt certain policies in order to promote desired behavior
among their citizens. For each of the following policies, determine what the incentive
is and what behavior the government wishes to promote. In each case, why do you
think that the government might wish to change people’s behavior, rather than allow
their actions to be solely determined by individual choice?
11. a. This policy creates an incentive to smoke less by making a pack of cigarettes more
costly. This is exactly what policy makers wish to promote. Cigarettes have unde-
sirable side effects on other people, which smokers do not (or only insufficiently)
take into account. One is that other people have to breathe in second – hand
smoke. Another is the cost of health care: when smokers who need treatment
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d. This tax creates the incentive to emit fewer air pollutants. Pollution has a nega-
12. In each of the following situations, explain how government intervention could
improve society’s welfare by changing people’s incentives. In what sense is the mar–
ket going wrong?
12. a. In deciding how much to drive, each driver does not take into account the cost of
auto emissions he or she imposes on others. That is, the market will lead to there
being too much pollution. One way for governments to intervene would be to tax
13. In 2010, Tim Geithner, Treasury secretary at the time, published an article defending
the administration’s policies. “The recession that began in late 2007 was extraordi-
narily severe,” he declared, “but the actions we took at its height to stimulate the
economy helped arrest the freefall, preventing an even deeper collapse and putting
the economy on the road to recovery. Which two of the three principles of economy-
wide interaction are at work in this statement?
13. The Obama stimulus is an example of government policy aimed at changing spend-
ing: by cutting taxes and also by directly increasing government spending, the pack-
14. In August 2007, a sharp downturn in the U.S. housing market reduced the income
of many who worked in the home construction industry. A Wall Street Journal news
article reported that Walmart’s wire-transfer business was likely to suffer because
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14. The correct principle in this case is that one person’s spending is another person’s
income. Here, a reduction in spending for U.S. home purchases leads to a fall in the
15. In 2012, Hurricane Sandy caused massive destruction to the northeast United States.
Tens of thousands of people lost their homes and possessions. Even those who
15. The destruction caused by Hurricane Sandy caused a reduction in spending by
residents in the area. This, in turn, led to reduced income as businesses failed
16. During the Great Depression, food was left to rot in the fields or fields that had once
been actively cultivated were left fallow. Use one of the principles of economy-wide
interaction to explain how this could have occurred.
16. During the Great Depression, spending fell far short of the country’s capacity to pro-
duce. This reflects the principle that overall spending sometimes gets out of line with
