EOC1: End of Chapter Problems - Ch. 1: First Principles

Which of the following describes an equilibrium? Which does not? 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 two sections are 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. Given the situations described above, what would you expect to happen? Select all that apply.

a. not an equilibrium b. equilibrium c. not an equilibrium Students will switch from section A to section B. More people will use the side streets.

For the following examples, state how you would use the principle of marginal analysis to make a decision. Deciding how many days to wait before doing your laundry 1-A. The marginal benefit of waiting is 1-B. The marginal cost of waiting is Deciding how much time to spend researching before writing your term paper 2-A. The marginal benefit of more research is 2-B. The marginal cost of more research is

1-A. Free time to do other things now. 1-B. Fewer clean clothes from which to choose. 2-A. Finding prior research that supports your thesis. 2-B Less time for your other classes, or for other things.

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. 1. How has the market gone wrong? 2.Which intervention policy could help the situation? 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. 1. How has the market gone wrong? 2. What intervention policy could help the situation?

1-a. Drivers do not recognize that auto emissions create costs for others. 2-a. Tax gas guzzlers and subsidize new technologies 1-b. There are too few streetlights in Woodville. 2-b. Pay for streetlights with tax revenues

Consider the efficiency and equity implications of this scenario. How would you go about balancing the concerns of equity and efficiency? The government pays the full tuition for every college student to study whatever subject he or she wishes. 1. This situation is 2. Which of the following is not an efficiency concern with such a plan?

1. equitable but not efficient. 2. It allows everyone, regardless of ability to pay, to attend college.

In 2010, Tim Geithner, the U.S. Secretary of the Treasury at the time, published an article defending the administration's policies. "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." (Geithner, 2010) Which two of the three principles of economy-wide interaction are at work in this statement?

Government policies can change spending. One person's spending is another person's income.

During the Great Depression, food was left to rot in the fields, or fields that had once been actively cultivated were left fallow. 1. Which principle of economy-wide interactions can you use to explain why this occured? 2. Select the statement that best explains why food was left to rot in the fields.

1. Overall spending sometimes gets out of line with the economy's productive capacity. 2. A decrease in spending resulted in farmers being unable to find enough buyers for food that had already been produced.

For the following examples, state how you would use the principle of marginal analysis to make a decision. Deciding how many bags of chips to eat 1. The marginal benefit of eating more chips is 2. The marginal cost of eating more chips is Deciding how many class lectures to skip 3. The marginal benefit of skipping lectures is 4. The marginal cost of skipping lectures is

1. satisfying you hunger 2. the money you pay and the calories you consume. 3. you can spend the time doing other things. 4. getting further behind with the material.

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, consider 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? Better off: Worst off:

Better off: You in your car, the cafe owner, you eating breakfast, you typing class notes, your roommate. Worst off: Other Drivers.

Use the concept of opportunity cost to explain the following five scenarios. 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 areas 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 a.m.

a. If the job market is bad, the salary you can expect to earn is low, or you might be unemployed. b. When the economy is slow, the opportunity cost of people's time is also lower, so the opportunity cost of spending time doing their own repairs is lower. c. The price per square foot of land is much higher in urban areas than in suburban areas. d. Driving long distances to supermarkets takes time that could be spent doing other things. e. An extra hour of sleep is much more valuable before 10 a.m. than later in the day.

In October 2015, Hurricane Joaquin caused massive destruction to North and South Carolina, New York, and Florida. Catastrophic flooding occurred, with 25 deaths, hundreds of people requiring rescue, and estimated damage costs of $12 billion. Even those who were not directly affected by the destruction were hurt because businesses and jobs dried up. Which principle of economy-wide interaction explains how government intervention can help in this situation?

Increased government spending in the affected areas will encourage other people to spend more.

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 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.

$58.99 plus the time value of the 3- to 7-day wait minus the $10 you save by not buying at the bookstore

Liza needs to buy a textbook for the next economics class. The price at the college bookstore is $65. Liza finds the textbook online at two sites. The first website offers it for $55 and the second 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 to 7 days $3.99 Second-day air 2 business days $8.98 Next-day air 1 business day $13.98 Below are the relevant choices for this student. What is the monetary cost of each of Liza's options? 1. Buy from bookstore 2. Buy from first site with 1-day delivery 3. Buy from first site with 2-day delivery 4. Buy from first site with 3- to 7-day delivery 5. Buy from second site with 1-day delivery 6. Buy from second site with 2-day delivery 7. Buy from second site with 3- to 7-day delivery Which option will Liza choose?

1. $65 2. $68.98 3. $63.98 4. $58.99 5. $70.98 6. $65.98 7. $60.99 Until we know more about how much she values the time she may spend waiting, we will not know her preferred choice.

Indicate whether or not you think the situation is efficient. If it is not efficient, why not? What actions would make it efficient? Although they cost the same amount to prepare, the dorm cafeteria consistently provides too many dishes that diners do not like, such as tofu casserole, and too few dishes that diners do like, such as roast turkey with dressing. 1. Is the situation efficient? 2. Why or why not? 3. Can anything be done to improve efficiency?

1. Inefficient 2. A reallocation of resources could produce a more desirable mix of outputs. 3. Produce more of the items that students prefer and cut back on less popular choices.

Indicate whether or not you think the situation is efficient. If it is not efficient, why not? What actions would make it efficient? 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. Is this situation efficient? Why or why not? Can anything be done to improve efficiency?

1. Inefficient 2. Less of this activity could be done without harming anyone. 3. Require that students pay for the electricity they use.

Indicate whether or not you think the situation is efficient. If it is not efficient, why not? What actions would make it efficient? 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 can get a space. 1. Is the situation efficient? 2. Why or why not? 3. Can anything be done to improve efficiency?

1. Inefficient 2. There is no recognition of the different needs of the students, so it is inefficient. 3. The unenrolled major should be willing to pay the enrolled non-major to give up his or her space.

1. 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. 2. 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. 3. State governments mandate that it is illegal to drive without passing a driving exam. 4. 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.

1. Markets move toward equilibrium. 2. There are gains from trade. 3. When markets do not achieve efficiency, government intervention can improve society's welfare. 4. Government policies can change spending.

1. You buy a used textbook from your roommate. Your roommate uses the money to buy songs from iTunes. 2. 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. 3. 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. 4. You realize that you can graduate a semester early by forgoing a semester of study abroad.

1. One person's spending is another person's income. 2. "How much" decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. 3. Resources should be used as efficiently as possible to achieve society's goals. 4. The opportunity cost of an item—what you must give up in order to get it—is its true cost.

1. You choose to purchase your textbooks online through Chegg rather than paying a higher price for the same books through your college bookstore. 2. On your spring break trip, your budget is limited to $35 a day. 3. 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. 4. Craigslist allows departing students to sell items such as used books, appliances, and furniture rather than giving them away as they formerly did.

1. People usually respond to incentives, exploiting opportunities to make themselves better off. 2.People must make choices because resources are scarce. 3. Overall spending sometimes gets out of line with the economy's productive capacity. 4. Because people usually exploit gains from trade, markets usually lead to efficiency.

Governments often adopt certain policies in order to promote desired behavior among their citizens. For the following policy, determine what the incentive is and what behavior the government wishes to promote. 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? The government pays parents $100 when their child is vaccinated for measles. 1. The incentive is: 2. The behavior to be promoted is: 3. Why would the government wish to change people's behavior?

1. Sick people can pass diseases on to others. 2. getting vaccinated. 3. Sick people can pass diseases on to others.

Consider the efficiency and equity implications of this scenario. How would you go about balancing the concerns of equity and efficiency? When people lose their jobs, the government provides unemployment benefits until they find new jobs. 1. This situation is: 2. Which of the following is not an efficiency concern with such a plan?

1. equitable but not efficient. 2. It guarantees everyone a certain amount of income.

Governments often adopt certain policies in order to promote desired behavior among their citizens. For the following policy, determine what the incentive is and what behavior the government wishes to promote. 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 tax of $5 per pack is imposed on cigarettes. 1. The incentive is: 2. The behavior to be promoted is: 3. Why would the government wish to change people's behavior?

1. increasing the price of cigarettes. 2. smoking less. 3. Smoking has undesirable side effects on other people.

Governments often adopt certain policies in order to promote desired behavior among their citizens. For the following policy, determine what the incentive is and what behavior the government wishes to promote. 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? The government imposes a tax on the amount of air pollution that a company discharges. 1. The incentive is: 2. The behavior to be promoted is: 3. Why would the government wish to change people's behavior?

1. the extra cost of discharging pollution. 2. reducing pollution. 3. The pollution creates costs for society that the firm does not take into account.

Governments often adopt certain policies in order to promote desired behavior among their citizens. For the following policy, determine what the incentive is and what behavior the government wishes to promote. 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? The government pays college students to tutor children from low-income families. 1. The incentive is: 2. The behavior to be promoted is: 3. Why would the government wish to change people's behavior?

1. the reduced cost of tutoring services. 2. helping less-fortunate children. 3. The better that children do in school, the more productive, happier, and healthier citizens they will be.

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, correctly order the statements below 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. 1. reduction in spending for U.S. home purchases "adverse impact on Mexican economy" 2. Which principle of economy-wide interactions can you use to explain why reduced spending in housing is likely to adversely affect the Mexican economy?

A-1. Fall in income of construction workers. A-2. Reduction in funds sent by workers to relatives in Mexico. A-3. Reduction in spending by Mexican households A-4. Less business for Mexican firms and job loss in Mexico. B-2. One person's spending is another person's income.

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.

a. The Hatfields have a lower opportunity cost for chickens, and the McCoys have a lower opportunity cost for corn. b. The McCoys have a lower opportunity cost for chickens, and the Hatfields have a lower opportunity cost for corn.

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

a. The income you would have earned on the job and the valuable on-the-job experience you would have acquired b. A lower grade on the exam, most likely c. Waiting for the bus