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Solution Manual for Economics 5th Edition By Paul Krugman, Robin Wells. A+
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Solution Manual for Economics 5th Edition By PaulKrugman, Robin Wells. A+
CHAPTER 1
1. Explain how each of the twelve principles of economics is illustrated in this case.
Suggested Solution
1. Principle 1: People must make choices because resources are scarce. Neither money nor time is unlimited; they are both scarce
resources. Priceline caters to customers who have chosen to sacrifice some of their preferences about convenience or quality in
order to get a lower price.
Principle 2: The opportunity cost of an item—what you must give up in order to get it—is its true cost. The true cost of an empty
airplane seat or an empty hotel bed is the revenue the airline or hotel could have earned from the next best use of that seat or
bed—namely, the revenue earned from a paying customer.
Principle 3: “How much” is a decision at the margin. How much more a customer is willing to pay for a ticket to a destination
depends upon how much time and inconvenience is saved by purchasing the higher priced ticket.
Likewise, how much more a customer is willing to pay for a ticket purchased well in advance of his travel date depends upo
how much more security he gains by advance planning rather than waiting to purchase. The same principle applies to decision
about the qual- ity and location of hotels, and so on.
Principle 4: People usually respond to incentives, exploiting opportunities to make themselves better off. Priceline was successful
because its customers—
travelers, airlines, and hotels—were exploiting opportu- nities to make themselves better off by using its services. Priceline also
responded to incentives to make itself bet- ter off by expanding into new profitable markets such as Europe.
Principle 5: There are gains from trade. Travelers gain from using Priceline’s networks of hotels to find a hotel rather than
doing the research themselves. They gain from using Priceline’s services to book a flight rather than contacting each airline
individually. Also, travelers gain by using the services of airlines and hotels, rather than transporting themselves or pitch- ing
a tent overnight to sleep in. Hotels, particularly
in Europe, gain from using Priceline’s network rather than trying to contact potential customers directly.
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