Chapter 2:
1. Which of the following goods are scarce?
a. garbage
b. salt water in the ocean
c. clothes
d. clean air in a big city
e. dirty air in a big city
f. a public library
Answer: Scarce goods are those that we would like to have more of, but given limited
2. Explain the difference between poverty and scarcity.
Answer: Being poor means that you have access to few resources, which limits the goods
3. The automotive revolution after World War II reduced the time involved for travel and shipping goods.
This innovation allowed the U.S. economy to produce more goods and services since it freed resources
involved in transportation for other uses. The transportation revolution also increased wants. Identify two
ways the car and truck revealed new wants.
Answer: The car freed Americans to travel and helped to create the tourism business. New
4. The price of a one-way bus trip from Los Angeles to New York City is $150.00. Sarah, a school
teacher, pays the same price in February (during the school year) as in July (during her vacation), so the
cost is the same in February as in July. Do you agree?
ng school (it would cost part of
home run into the upper deck at Busch Stad
game a free Big Mac. If holders of ticket stubs have to stand in line for ten minutes, is the Big Mac really
Answer:
6. List some things that you need. Then ask yourself if you would still want some of those things if the
price were five times higher. Would you still want them if the price were 10 times higher?
Answers will vary. The main point here is to recognize that how much of something you
7. List the opportunity costs of the following:
a. going to college
b. missing a lecture
c. withdrawing and spending $100 from your savings account, which earns 5 percent interest annually
d. going snowboarding on the weekend before final examinations
Answer: The opportunity cost of an activity is always the value of the best alternative
given up.
8. Which of the following activities require marginal thinking, and why?
a. studying
b. eating
c. driving
d. shopping
e. getting ready for a night out
Answer: Marginal thinking involves incremental changes to a plan of action. All of the
9. Should you go to the movies this Friday? List the factors that affect the possible benefits and costs of
this decision. Explain where uncertainty affects the benefits and costs.
Answer: The benefits of going to the movie include the happiness you receive from being
10. Explain why following the rule of rational choice makes a person better off.
Answer: As long as a person follows the rule of rational choice, they will always make
11. Which of the following are positive incentives? Negative incentives? Why?
a. A fine for not cleaning up after your dog defecates in the park
b. A trip to Hawaii paid for by your parents or significant other for earning an A in your economics course.
c. A higher tax on cigarettes and alcohol.
d. A subsidy for installing solar panels on your house.
Answer: Positive incentives are those that either increase benefits or reduce costs and
12. Modern medicine has made organ transplants a common occurrence, yet the number of organs that
people want far exceeds the available supply. According to CNN, ten people die each day because of a
lack of transplantable organs like kidneys and livers. Some economists have recommended that an
organ market be established through which doctors and others could pay people for the right to use their
organs when they die. The law currently forbids the sale of organs. What do you think of such a
proposal? What kind of incentives would an organ market provide for people to allow others to use their
organs? What would happen to the supply of organs if, instead of relying on donated kidneys, livers, and
retinas, doctors and hospitals could bid for them? What drawbacks would a free market in organs have?
Have you made arrangements to leave your organs to your local organ bank? Would you do so if you
could receive $50,000 for them?
Answer: An organ market that provided cash rewards would likely increase the supply of
available organs, especially if people from poor countries were allowed to participate. It would
13. Throughout history, many countries have chosen the path of autarky, choosing to not trade with other
countries. Explain why this path would make a country poorer.
Answer: Denying trade possibilities also eliminates the possibility of specialization. In
14. Farmer Fran can grow soybeans and corn. She can grow 50 bushels of soybeans or 100 bushels of
corn on an acre of her land for the same cost. The price of soybeans is $1.50 per bushel and the price of
corn is $.60 per bushel. Show the benefits to Fran of specialization. What should she specialize in?
15. Which region has a comparative advantage in the following goods:
a. wheat: Colombia or the United States?
b. coffee: Colombia or the United States?
c. timber: Iowa or Washington?
d. corn: Iowa or Washington?
Answers: a. The United States has a comparative advantage in wheat production; b.
16. Why is it important that the country or region with the lower opportunity cost produce the good? How
would you use the concept of comparative advantage to argue for reducing restrictions on trade between
countries?
Answer: It is important that a country or region specialize in the production of a good for
17. People communicate with each other in the market through the effect their decisions to buy or sell
have on prices. Indicate how each of the following would affect prices by putting a check in the
appropriate space.
a. People who see an energetic and loveable Jack Russell Terrier in a popular TV series want Jack
Russell Terriers as pets. The price of Jack Russell Terriers ___Rises ___ Falls.
b. Aging retirees flock to Tampa, Florida, to live. The price of housing in Tampa ___ Rises ___ Falls.
c. Weather-related crop failures in Colombia and Costa Rica reduce coffee supplies. The price of coffee
___ Rises ___ Falls.
d. Sugar cane fields in Hawaii and Louisiana are replaced with housing. The price of sugar ___
Rises ___ Falls.
e. More and more students graduate from U.S. medical schools. The wages of U.S. doctors___
Rises ___ Falls.
f. Americans are driving more and they are driving bigger, gas-guzzling cars like sports utility vehicles.
The price of gasoline _____ Rises _____ Falls.
18. Prices communicate information about the relative value of resources. Which of the following would
cause the relative value and, hence, the price, of potatoes to rise?
a. A Fungus infestation wipes out half the Idaho potato crop.
b. The price of potato chips rises.
c. Scientists find that eating potato chips makes you better looking.
d. The prices of wheat, rice, and other potato substitutes fall dramatically.
19. Imagine that you are trying to decide whether to cross a street without using the designated crosswalk
at the traffic signal. What are the expected marginal benefits of crossing? The expected marginal costs?
How would the following conditions change your benefit cost equation?
a. The street was busy.
b. The street was empty and it was 3 A.M.
c. You were in a huge hurry.
d. A police officer was standing 100 feet away.
e. The closest crosswalk was a mile away.
f. The closest crosswalk was 10 feet away.
Answer: The expected marginal benefit of crossing a street is the ability to get to the other
