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Chapter 1

Ten Principles of Economics

Educators


Problem 1

Describe some of the trade-offs faced by each of the following:
a. a family deciding whether to buy a new car
b. a member of Congress deciding how much to spend on national parks
c. a company president deciding whether to open a new factory
d. a professor deciding how much to prepare for class
e. a recent college graduate deciding whether to go to graduate school

Yi Chun L.
Washington University in St Louis

Problem 2

You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs?

Yi Chun L.
Washington University in St Louis

Problem 3

You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case? Explain.

Kaylee M.
Numerade Educator

Problem 4

You win \$100 in a basketball pool. You have a choice between spending the money now and putting it
away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the \$100 now?

Kaylee M.
Numerade Educator

Problem 5

The company that you manage has invested \$5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to \$3 million. If it would cost \$1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

Kaylee M.
Numerade Educator

Problem 6

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to
only two years of benefits.
a. How does this change affect the incentives for working?
b. How might this change represent a trade-off between equality and efficiency?

Kaylee M.
Numerade Educator

Problem 7

Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.
a. regulating cable TV prices
b. providing some poor people with vouchers that can be used to buy food
c. prohibiting smoking in public places
d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller
companies
e. imposing higher personal income tax rates on people with higher incomes
f. instituting laws against driving while intoxicated

Yi Chun L.
Washington University in St Louis

Problem 8

Discuss each of the following statements from the standpoints of equality and efficiency.
a. "Everyone in society should be guaranteed the best healthcare possible."
b. "When workers are laid off, they should be able to collect unemployment benefits until they find a
new job."

Kaylee M.
Numerade Educator

Problem 9

In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred?

Kaylee M.
Numerade Educator

Problem 10

Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

Kaylee M.
Numerade Educator

Problem 11

During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort. To make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an "inflation tax." Who do you think is being "taxed" when more money is printed? Why?

Yi Chun L.
Washington University in St Louis