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Section 1: Basic Economic Concepts
Question 1
1. In each of the following situations, identify which of the twelve principles is at work.
a. You choose to purchase your textbooks online through Chegg rather than paying a higher
price for the same books through your college bookstore.
b. On your spring break trip, your budget is limited to $35 a day.
c. Craigslist allows departing students to sell items such as used books, appliances, and
furniture rather than giving them away as they formerly did.
d. After a hurricane did extensive damage to homes on the island of St. Crispin, homeowners
wanted to purchase many more building materials and hire many more workers than were
available on the island. As a result, prices for goods and services rose dramatically across
the board.
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 versus 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.
h. You realize that you can graduate a semester early by forgoing a semester of study abroad.
i. At the student center, there is a bulletin board on which people advertise used items for sale,
such as bicycles. Once you have adjusted for differences in quality, all the bikes sell for
about the same price.
j. You are better at performing lab experiments, and your lab partner is better at writing lab
reports. So the two of you agree that you will do all the experiments, and she will write up
all the reports.
k. State governments mandate that it is illegal to drive without passing a driving exam.
l. Your parents’ after-tax income has increased because of a tax cut passed by Congress. They
therefore increase your allowance, which you spend on a spring break vacation.
Solution 1
l. Government policies can change spending. In this case, a tax cut has increased spending.
Question 2
2. Describe some of the opportunity costs when you decide to do the following.
a. Attend college instead of taking a job
b. Watch a movie instead of studying for an exam
c. Ride the bus instead of driving your car
Solution 2
Question 3
3. Liza needs to buy a textbook for the next economics class. The price at the college bookstore
is $65. One website 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.
Shipping method
Delivery time
Charge
Standard shipping
3–7 days
$3.99
Second-day air
2 business days
8.98
Next-day air
1 business day
13.98
a. What is the opportunity cost of buying online instead of at the bookstore? Note that if you
buy the book online, you must wait to get it.
b. Show the relevant choices for this student. What determines which of these options the
student will choose?
Solution 3
b. Below is a list of all of Liza’s options and their purely monetary costs:
Question 4
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.
c. There are more parks in suburban than in urban areas.
d. Convenience stores, which have higher prices than supermarkets, cater to busy people.
e. Fewer students enroll in classes that meet before 10:00 A.M.
Solution 4
Question 5
5. For the following examples, state how you would use the principle of marginal analysis to
make a decision.
a. Deciding how many days to wait before doing your laundry
b. Deciding how much time to spend researching before writing your term paper
c. Deciding how many bags of chips to eat
d. Deciding how many class lectures to skip
Solution 5
Question 6
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 course notes
for your roommate because she was texting in class—in return for which she will do your
laundry for a month. For each of these actions, describe how your individual choices
interacted with the individual choices made by others. Were other people left better off or
worse off by your choices in each case?
Solution 6
Question 7
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-on-the-cob, and
each is self-sufficient, raising their own chickens and growing their own corn. Explain the
conditions under which each of the following would be true.
a. The two families are made better off when the Hatfields specialize in raising chickens, the
McCoys specialize in growing corn, and the two families trade.
b. The two families are made better off when the McCoys specialize in raising chickens, the
Hatfields specialize in growing corn, and the two families trade.
Solution 7
Question 8
8. Which of the following 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 via highway but only 15 minutes via side streets.
b. At the intersection of Main and Broadway are two gas stations. One station charges $3.00
per gallon for regular gas and the other charges $2.85 per gallon. Customers can get service
immediately at the first station but must wait in a long line at the second.
c. Every student enrolled in Economics 101 must also attend a weekly tutorial. This year there
are two sections offered: section A and section B, which meet at the same time in adjoining
classrooms and are taught by equally competent instructors. Section A is overcrowded,
with people sitting on the floor and often unable to see what is written on the board at the
front of the room. Section B has many empty seats.
Solution 8
Question 9
9. For each of the following, explain whether you think the situation is efficient or not. If it is not
efficient, why not? What actions would make it 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.
b. Although they cost the same amount to prepare, the cafeteria in your dorm consistently
provides too many dishes that diners don’t like, such as tofu casserole, and too few dishes
that diners do like, such as roast turkey with dressing.
c. The enrollment for a particular course exceeds the spaces available. Some students who
need to take this course to complete their major are unable to get a space even though
others who are taking it as an elective do get a space.
Solution 9
Question 10
10. Discuss the efficiency and equity implications of each of the following. 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.
Solution 10
Question 11
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?
a. A tax of $5 per pack is imposed on cigarettes.
b. The government pays parents $100 when their child is vaccinated for measles.
c. The government pays college students to tutor children from low-income families.
d. The government imposes a tax on the amount of air pollution that a company discharges.
Solution 11
Question 12
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 market going wrong?
a. Pollution from auto emissions has reached unhealthy levels.
b. Everyone in Woodville would be better off if streetlights were installed in the town. But no
individual resident is willing to pay for installation of a streetlight in front of his or her
house because it is impossible to recoup the cost by charging other residents for the benefit
they receive from it.
Solution 12
Question 13
13. Tim Geithner, a former U.S. Treasury Secretary, has said, “The recession that began in late
2007 was extraordinarily 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?
Solution 13
Question 14
14. A sharp downturn in the U.S. housing market in August 2007 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 many construction
workers are Hispanics who regularly send part of their wages back to relatives in their home
countries via Walmart. With this information, use one of the principles of economy-wide
interaction to trace a chain of links that explains how reduced spending for U.S. home
purchases is likely to affect the performance of the Mexican economy.
Solution 14
