Economics Review

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Chapter 1
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...
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