Question 1.7

1. In each of the following situations, identify which of the twelve principles is at work.

  1. You choose to shop at the local discount store rather than paying a higher price for the same merchandise at the local department store.

  2. On your spring break trip, your budget is limited to $35 a day.

  3. The student union provides a website on which departing students can sell items such as used books, appliances, and furniture rather than give them away to their roommates as they formerly did.

  4. 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.

  5. You buy a used textbook from your roommate. Your roommate uses the money to buy songs from iTunes.

  6. 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.

  7. 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.

  8. You realize that you can graduate a semester early by forgoing a semester of study abroad.

  9. At the student union, 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.

  10. 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.

  11. State governments mandate that it is illegal to drive without passing a driving exam.

  12. 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.

Question 1.8

2. Describe some of the opportunity costs when you decide to do the following.

  1. Attend college instead of taking a job

  2. Watch a movie instead of studying for an exam

  3. Ride the bus instead of driving your car

Question 1.9

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.


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
  1. 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.

  2. Show the relevant choices for this student. What determines which of these options the student will choose?

Question 1.10

4. Use the concept of opportunity cost to explain the following.

  1. More people choose to get graduate degrees when the job market is poor.

  2. More people choose to do their own home repairs when the economy is slow and hourly wages are down.

  3. There are more parks in suburban than in urban areas.

  4. Convenience stores, which have higher prices than supermarkets, cater to busy people.

  5. Fewer students enroll in classes that meet before 10:00 A.M.

Question 1.11

5. In the following examples, state how you would use the principle of marginal analysis to make a decision.

  1. Deciding how many days to wait before doing your laundry

  2. Deciding how much library research to do before writing your term paper

  3. Deciding how many bags of chips to eat

  4. Deciding how many lectures of a class to skip

Question 1.12

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 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?

Question 1.13

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.

  1. 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.

  2. 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.

Question 1.14

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?

  1. 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 only 15 minutes when you go by side streets.

  2. 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.

  3. 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.

Question 1.15

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?

  1. 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.

  2. 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.

  3. 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.

Question 1.16

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?

  1. The government pays the full tuition for every college student to study whatever subject he or she wishes.

  2. When people lose their jobs, the government provides unemployment benefits until they find new ones.

Question 1.17

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?


  1. A tax of $5 per pack is imposed on cigarettes.

  2. The government pays parents $100 when their child is vaccinated for measles.

  3. The government pays college students to tutor children from low-income families.

  4. The government imposes a tax on the amount of air pollution that a company discharges.

Question 1.18

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?

  1. Pollution from auto emissions has reached unhealthy levels.

  2. 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.

Question 1.19

13. In 2010, Tim Geithner, Treasury secretary at the time, published an article defending the administration’s policies. In it he said, “The recession that began in late 2007 was extraordinarily severe. But the actions we took at its height to stimulate the economy helped arrest the free fall, 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?

Question 1.20

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 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.

Question 1.21

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 weren’t directly affected by the destruction were hurt because businesses failed or contracted and jobs dried up. Using one of the principles of economy-wide interaction, explain how government intervention can help in this situation.

Question 1.22

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.