In each of the following situations, identify which of the twelve principles is at work.
a. You choose to shop at the local discount store rather than paying a higher price
for the same merchandise at the local department store.
b. On your spring break trip, your budget is limited to $35 a day.
...
CHA
First Principles
1
1. In each of the following situations, identify which of the twelve principles is at work.
a. You choose to shop at the local discount store rather than paying a higher price
for the same merchandise at the local department store.
b. On your spring break trip, your budget is limited to $35 a day.
c. The student union provides a website on which departing students can sell items
such as used books, appliances, and furniture rather than giving them away to
their roommates as they formerly did.
d. 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.
e. You buy a used textbook from your roommate. Your roommate uses the money to
buy songs from iTunes.
f. 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 ver-
sus how jittery it will make you feel.
g. 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.
h. You realize that you can graduate a semester early by forgoing a semester of study
abroad.
i. 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.
j. 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.
k. State governments mandate that it is illegal to drive without passing a driving exam.
l. 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.
Solution
1. a. People usually exploit opportunities to make themselves better off. In this case,
you make yourself better off by buying merchandise at a lower price.
b. Resources are scarce. Since you have only $35 a day, your resources are limited
(scarce).
c. Markets usually lead to efficiency. The market here is represented by the buyers
and sellers who use the student union website to trade goods, in contrast to the
“nonmarket” of simply giving items away to one’s roommate. The market is effi-
cient because it enables people who want to sell items to find those who want to
buy those items. This is in contrast to a system in which items are simply left with
a roommate, who may have little or no desire to have them.
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d. Overall spending sometimes gets out of line with the economy’s productive capac-
ity. The spending by St. Crispin homeowners on building materials and workers
fell short of the economy’s ability to produce those goods and services. As a result,
prices on the island rose across the board (inflation).
e. One person’s spending is another person’s income. Your spending on the used
textbook is your roommate’s income.
f. “How much” is a decision at the margin. Your decision is one of “how much”
coffee to consume, and you evaluate the trade-off between keeping yourself awake
and becoming more jittery from one more cup of coffee.
g. Resources should be used as efficiently as possible to achieve society’s goals.
Allocating scarce lab space according to when each student can use that space is
efficient.
h. The real cost of something is what you must give up to get it. The real cost of a
semester abroad is giving up the opportunity to graduate early.
i. Markets move toward equilibrium. Any bicycle a buyer chooses will leave him or
her equally well off. That is, a buyer who chooses a particular bicycle cannot change
actions and find another bicycle that makes him or her better off. Also, no seller
can take a different action that makes him or her better off: no seller can charge a
higher price for a bicycle of similar quality, since no one would buy that bicycle.
j. There are gains from trade. If each person specializes in what he or she is good at
(that is, in comparison with others that person has an advantage in producing
that good), then there will be gains from specialization and trade.
k. When markets don’t achieve efficiency, government intervention can improve
society’s welfare. Unsafe drivers don’t take into account the dangers they pose to
others and often to themselves. So when unsafe drivers are allowed to drive, every-
one is made worse off. Government intervention improves society’s welfare by
assuring a minimum level of competence in driving.
l. Government policies can change spending. In this case, a tax cut has increased
spending.
2. 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
Solution
2. a. One of the opportunity costs of going to college is not being able to take a job.
By choosing to go to college, you give up the income you would have earned on
the job and the valuable on-the-job experience you would have acquired. Another
opportunity cost of going to college is the cost of tuition, books, supplies, and so
on. Alternatively, the benefit of going to college is being able to find a better, more
highly paid job after graduation in addition to the joy of learning.
b. Watching the movie gives you a certain benefit, but allocating your time (a scarce
resource) to watching the movie also involves the opportunity cost of not being
able to study for the exam. As a result, you will likely get a lower grade on the
exam—and all that that implies.
c. Riding the bus gets you where you need to go more cheaply than, but probably not
as conveniently as, driving your car. That is, some of the opportunity costs of
taking the bus involve waiting for the bus, having to walk from the bus stop to
where you need to go rather than parking right outside the building, and probably
a slower journey. If the opportunity cost of your time is high (your time is
valuable), these costs may be prohibitive.
, CHAPTER 1 FIRST PRINCIPLES
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 Delivery
method 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
a. 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.
b. Show the relevant choices for this student. What determines which of these
options the student will choose?
Solution
3. a. The opportunity cost of buying online is whatever you must give up to get the
book online. So the opportunity cost of buying online is the sum of the shipping
charges plus the opportunity cost of your time spent waiting for the book to arrive
(at the bookstore the book is available immediately) minus the cost saving you
receive by buying online versus buying at the bookstore.
b. Below is a list of all of Liza’s options and their purely monetary costs:
Buy from bookstore $65
Buy from first site (price $55), 1-day delivery $55 + $13.98 = $68.98
Buy from first site (price $55), 2-day delivery $55 + $08.98 = $63.98
Buy from first site (price $55), 3- to 7-day delivery $55 + $03.99 = $58.99
Buy from second site (price $57), 1-day delivery $57 + $13.98 = $70.98
Buy from second site (price $57), 2-day delivery $57 + $08.98 = $65.98
Buy from second site (price $57), 3- to 7-day delivery $57 + $03.99 = $60.99
It is clear that Liza would never buy from the second site, where the book costs
$57: for each delivery time, she is better off buying the book from the first site,
where the book costs $55. It is also clear that she would never buy the book from
the first site and have it delivered the next business day: it costs more that way
($68.98) than getting it from the bookstore (assuming that it is costless to get to
and from the bookstore). But it is not clear whether she will buy the book from
the bookstore or the first site with delivery times of 2 or 3–7 days: this depends on
her opportunity cost of time. The higher the cost of waiting, the more likely she is
to buy the book from the bookstore, where she does not need to wait.
4. Use the concept of opportunity cost to explain the following.
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 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 10:00 A.M.
, S-4 CHAPTER 1 FIRST PRINCIPLES
Solution
4. a. The worse the job market, the lower the opportunity cost of getting a graduate
degree. One of the opportunity costs of going to graduate school is not being able
to work. But if the job market is bad, the salary you can expect to earn is low or
you might be unemployed—so the opportunity cost of going to school is also low.
b. When the economy is slow, the opportunity cost of people’s time is also lower: the
wages they could earn by working longer hours are lower than when the economy
is booming. As a result, the opportunity cost of spending time doing your own
repairs is lower—so more people will decide to do their own repairs.
c. The opportunity cost of parkland is lower in suburban areas. The price per square
foot of land is much higher in urban than in suburban areas. By creating park-
land, you therefore give up the opportunity to make much more money in cities
than in the suburbs.
d. The opportunity cost of time is higher for busy people. Driving long distances to
supermarkets takes time that could be spent doing other things. Therefore, busy
people are more likely to use a nearby convenience store.
e. Before 10:00 A.M. the opportunity cost of time for many students is very high—it
means giving up an extra hour’s sleep. That extra hour is much more valuable
before 10:00 A.M. than later in the day.
5. In the following examples, state how you would use the principle of marginal analy-
sis to make a decision.
a. Deciding how many days to wait before doing your laundry
b. Deciding how much library research to do before writing your term paper
c. Deciding how many bags of chips to eat
d. Deciding how many lectures of a class to skip
Solution
5. a. Each day that you wait to do your laundry imposes a cost: you have fewer clean
clothes to choose from. But each day that you wait also confers a benefit: you can
spend your time doing other things. You will wait another day to do your laundry
if the benefit of waiting to do the laundry that day is greater than the cost.
b. The more research you do, the better your paper will be. But there is also an
opportunity cost: every additional hour you spend doing research means you can-
not do other things. You will weigh the opportunity cost of doing one more hour
of research against the benefit gained (in terms of an improved paper) from doing
research. You will do one more hour of research if the benefit of that hour out-
weighs the cost.
c. Each bag of chips you eat gives you a benefit: it satisfies your hunger. But it also
has a cost: the money spent for each bag (and, if you are weight-conscious, the
additional calories). You will weigh the cost against the benefit of eating one more
bag. If the cost is less than the benefit, you will eat that one more bag of chips.
d. Each lecture that you skip implies a cost: getting further behind with the material
and having to teach it to yourself just before the exam. But each skipped lecture
also means you can spend the time doing other things. You will continue to skip
lectures if the cost of skipping is lower than the benefit of spending that time
doing other things.
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?
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