interactive activity
Chapter 1
First Principles
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.
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.
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f. “How much” is a decision at the margin. Your decision is one of “how much”
coffee to consume, and you evaluate the trade–off between keeping yourself
awake and becoming more jittery from one more cup of coffee.
g. Resources should be used as efficiently as possible to achieve society’s goals.
2. Describe some of the opportunity costs when you decide to do the following.
3. Liza needs to buy a textbook for the next economics class. The price at the col-
lege 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
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a. What is the opportunity cost of buying online instead of at the bookstore?
Solution
3. a. The opportunity cost of buying online is whatever you must give up to get the
book online. So the opportunity cost of buying online is the sum of the ship-
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 + $ 8.98 = $63.98
It is clear that Liza would never buy from the second site, where the book costs
$57: for each delivery time, she is better off buying the book from the first site,
where the book costs $55. It is also clear that she would never buy the book from
the first site and have it delivered the next business day: it costs more that way
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.
Solution
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.
b. When the economy is slow, the opportunity cost of people’s time is also lower:
the wages they could earn by working longer hours are lower than when the
economy is booming. As a result, the opportunity cost of spending time doing
your own repairs is lower—so more people will decide to do their own repairs.
c. The opportunity cost of parkland is lower in suburban areas. The price per
5. For the following examples, state how you would use the principle of marginal
analysis to make a decision.
Solution
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.
b. The more research you do, the better your paper will be. But there is also an
opportunity cost: every additional hour you spend doing research means you
cannot do other things. You will weigh the opportunity cost of doing one more
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?
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
greater 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 making them. This is an example of how everybody gains from trade:
both you and the café owner are better off.
Solution
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
Solution
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 describes an equilibrium? Which does not? If the situa-
tion does not describe an equilibrium, what would an equilibrium look like?
Solution
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
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
c. This is not an equilibrium. If students from section A attended section B
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?
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Solution
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 undesirable 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
b. This policy creates an incentive to have children vaccinated: it increases the
benefit to parents from vaccination of their children. Getting vaccinated
means not only that a child will not contract the measles but also that he or
she cannot pass the measles on to other children. That is, there is a side effect
c. This policy creates incentives for low-income families to get college students
to tutor their children, since getting a tutor is now cheaper or free. This
d. This tax creates the incentive to emit fewer air pollutants. Pollution has a
negative side effect for others: it decreases air quality (for instance, it contrib–
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?
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13. Tim Geithner, a former U.S. Treasury Secretary, has said, “The recession that
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
15. In October 2015, Hurricane Joaquin caused massive destruction to North and
South Carolina, New York, and Florida. Catastrophic flooding occurred with
16. During the Great Depression, food was left to rot in the fields or fields that
Solution
16. During the Great Depression, spending fell far short of the country’s capacity to
produce. This reflects the principle that overall spending sometimes gets out of