1. Describe some of the trade-offs faced by each of the following: 1. a family deciding whether to buy a new car 2. a member of Congress deciding how much to spend on national parks 3. a company president deciding whether to open a new factory 4. a professor deciding how much to prepare for class
5. a recent college graduate deciding whether to go to graduate school 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? 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. 4. You win $100 in a basketball pool.
You have a choice between spending the money now or 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?
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? 6. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduce 6. How does the provision of Social Security affect people’s incentive to save while working? 7. How does the reduction in benefits associated with higher earnings affect people’s incentive to work past age 65? 7. A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only two years of benefits.
8. How does this change affect the incentives for working? 9. How might this change represent a trade-off between equality and efficiency? 8. Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and trade can make two countries both better off. 9. 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 involve 10. regulating cable TV prices
11. providing some poor people with vouchers that can be used to buy food 12. prohibiting smoking in public places 13. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies 14. imposing higher personal income tax rates on people with higher incomes 15. instituting laws against driving while intoxicated 10. Discuss each of the following statements from the standpoints of equality and efficiency. 16. “Everyone in society should be guaranteed the best healthcare possible.” 17. “When workers are laid off, they should be able to collect unemployment benefits until they find a new job.” 11. 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? 12. 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?
13. In 2010, President Barack Obama and Congress enacted a healthcare reform bill in the United States. Two goals of the bill were to provide more Americans with health insurance (via subsidies for lower-income households financed by taxes on higher-income households) and to reduce the cost of healthcare (via various reforms in how healthcare is provided). 18. How do these goals relate to equality and efficiency? 19. How might healthcare reform increase productivity in the United States? 2
0. How might healthcare reform decrease productivity in the United States? 14. During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up this 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? 15. Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation. To make an intelligent decision, what would you need to know about inflation, unemployment, and the trade-off between them? 16. A policymaker is deciding how to finance the construction of a new airport. He can either pay for it by increasing citizens’ taxes or by printing more money. What are some of the short-run and long-run consequences of each option?
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities. 1. Selena pays a storekeeper $1 for a quart of milk. 2. Stuart earns $4.50 per hour working at a fastfood restaurant. 3. Shanna spends $30 to get a haircut. 4. Sally earns $10,000 from her 10 percent ownership of Acme Industrial. 2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.” 5. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.
6. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. 7. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. 8. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase in butter production? Explain.
3. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants. 4. An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either mow two lawns or wash one car. 9. Calculate how much of each service is produced under the following circumstances, which we label A, B, C, and D: * • All three spend all their time mowing lawns. (A)
* • All three spend all their time washing cars. (B) * • All three spend half their time on each activity. (C) * • Larry spends half his time on each activity, while Moe only washes cars and Curly only mows lawns. (D) 10. Graph the production possibilities frontier for this economy. Using your answers to part (a), identify points A, B, C, and D on your graph. 11. Explain why the production possibilities frontier has the shape it does. 12. Are any of the allocations calculated in part (a) inefficient? Explain. 5. Classify the following topics as relating to microeconomics or macroeconomics. 13. a family’s decision about how much income to save
14. the effect of government regulations on auto emissions 15. the impact of higher national saving on economic growth 16. a firm’s decision about how many workers to hire 17. the relationship between the inflation rate and changes in the quantity of money 6. Classify each of the following statements as positive or normative. Explain. 18. Society faces a short-run trade-off between inflation and unemployment. 19. A reduction in the rate of money growth will reduce the rate of inflation. 20. The Federal Reserve should reduce the rate of money growth. 21. Society ought to require welfare recipients to look for jobs. 22. Lower tax rates encourage more work and more saving. 7. If you were president, would you be more interested in your economic advisers’ positive views or their normative views? Why?