chapter:

1
>> First Principles

Krugman/Wells

CHECK YOUR UNDERSTANDING

2009 Worth Publishers
Check Your Understanding 1-1
Question 1

Explain how each of the following

situations illustrates one of the four
principles of individual choice.
1a) You are on your third trip to a restaurants all-you-can-eat
dessert buffet and are feeling very full. Although it would cost you
no additional money, you forgo another slice of coconut cream pie
but have a slice of chocolate cake.

1. resources are scarce

2. opportunity cost
3. trade-off in marginal analysis
4. people exploit opportunities to make
themselves better off
1b) Even if there were more resources in the world there would still be
scarcity.

1. resources are scarce

2. opportunity cost
3. trade-off in marginal analysis
4. people exploit opportunities to
make themselves better off
1c) Different teaching assistants teach several Economics 101
tutorials. Those taught by the teaching assistants with the best
reputations fill up quickly, with spaces left unfilled in the ones taught
by assistants with poor reputations.

1. resources are scarce

2. opportunity cost
3. trade-off in marginal analysis
4. people exploit opportunities to
make themselves better off
1d) To decide how many hours per week to exercise, you compare
the health benefits of one more hour of exercise to the effect on your
grades of one less hour spent studying.

1. resources are scarce

2. opportunity cost
3. trade-off in marginal analysis
4. people exploit opportunities to
make themselves better off
Check Your Understanding 1-1
Question 2

You make $45,000 per year at your

current job with Whiz Kids
Consultants. You are considering a job
offer from Brainiacs, Inc., which will
pay you $50,000 per year.
2a) The increased time spent commuting to your new job is an
opportunity cost of accepting the new job.

1. True
2. False
2b) The $45,000 salary from your old job is an opportunity cost of
accepting the new job.

1. True
2. False
2c) The more spacious office at your new job is an opportunity cost of
accepting the new job.

1. True
2. False
Check Your Understanding 1-2
Question 1

Directions: Which of the five principles

of interaction is illustrated in the
situations described?
 1a) Using the college Web site, any student who wants to sell a used
textbook for at least $30 is able to sell it to another who is willing to
pay $30.

1. gains from trade

2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve
societys goal.
4. Markets usually lead to efficiency.
5. When markets dont achieve efficiency, government intervention can
improve societys welfare.
1b) At a college tutoring co-op, students can arrange to provide tutoring in
subjects they are good in (like economics) in return for receiving tutoring in
subjects they are poor in (like philosophy).

1. gains from trade

2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve
societys goal.
4. Markets usually lead to efficiency
5. When markets dont achieve efficiency, government intervention can
improve societys welfare.
1c) The local municipality imposes a law that requires bars and
nightclubs near residential areas to keep their noise levels below a
certain threshold.

1. gains from trade

2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve
societys goal.
4. Markets usually lead to efficiency.
5. When markets dont achieve efficiency, government intervention
can improve societys welfare.
 1d) To provide better care for low-income patients, the local
municipality has decided to close some underutilized neighborhood
clinics and shift funds to the main hospital.

1. gains from trade

2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve
societys goals.
4. Markets usually lead to efficiency.
5. When markets dont achieve efficiency, government intervention
can improve societys welfare.
1e) On the college Web site, books of a given title with
approximately the same level of wear and tear sell for about the
same price.

1. gains from trade

2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to
achieve societys goals.
4. Markets usually lead to efficiency.
5. When markets dont achieve efficiency, government
intervention can improve societys welfare.
Check Your Understanding 1-2
Question 2

Which of the following describes an

equilibrium situation? Which does not?
2a) The restaurants across the street from the university dining hall
serve better-tasting and cheaper meals than those served at the
university dining hall. The vast majority of students continue to eat
at the dining hall.

1. True
2. False
2b) You currently take the subway to work. Although taking the bus
is cheaper, the ride takes longer. So you are willing to pay the
higher subway fare in order to save time.

1. True
2. False
 Check Your Understanding 1-3
Question 1

Explain how each of the following

examples illustrates one of the three
principles of economy-wide interactions.
1a) The White House urged Congress to pass major tax cuts in the
spring of 2001, when it became clear that the U.S. economy was
experiencing a slump.

1. One persons spending is another persons

income.
2. Overall spending doesnt match the
economys productive capacity.
3. Government policies can change spending.
1b) Oil companies are investing heavily in projects that will extract
oil from the oil sands of Canada. In Edmonton, Alberta, near the
projects, restaurants and other consumer businesses are booming.

1. One persons spending is another persons

income.
2. Overall spending doesnt match the
economys productive capacity.
3. Government policies can change spending.
1c) In the mid-2000s, Spain, which was experiencing a big housing
boom, also had the highest inflation rate in Europe.

1. One persons spending is another persons

income.
2. Overall spending doesnt match the
economys productive capacity.
3. Government policies can change spending.