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Chapter 1: Answers

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 efficient

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.

d. Overall spending sometimes gets out of line with the economy’s productive capacity.

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, everyone

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.

Chapter 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

highlypaid 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 3. 

a. This point is feasible but not efficient in production. Producing 1.8 billion bushels of wheat and 9 billion bushels of corn is less of both wheat and corn than is possible. They could produce more if all the available farmland were cultivated.

b. At this new production point, farmers would now produce 1 billion more bushels of wheat and 1.7 billion fewer bushels of corn than at their original production point. This reflects an opportunity cost of 1.7 bushels of corn per additional bushel of wheat. But, in fact, this new production point is not feasible because we know that opportunity costs are increasing. Starting from the original production point, the opportunity cost of producing one more bushel of wheat must be higher than 1.7 bushels of corn.

c. This new production point is feasible and efficient in production. Along the production possibility frontier, the economy must forgo 0.666 bushels of wheat per additional bushel of corn. So the increase in corn production from 11.807 billion bushels to 12.044 billion bushels costs the economy (12.044 − 11.807) billion bushels of corn × 0.666 bushel of wheat per bushel of corn = 0.158 bushel of wheat. This is exactly equal to the actual loss in wheat output: the fall from 2.158 billion to 2 billion bushels of wheat. 

Chapter 4.

a. Above the equilibrium price of $1.00: 

it is (($1.15 − $1.00) × 1.65 billion)/2 = $123.75 million. 

Producer surplus is the area above the supply curve but below the equilibrium price of $1.00: it is (($1.00 − $0.85) × 1.65 billion)/2 = $123.75 million. 

Total surplus therefore is $123.75 million + $123.75 million = $247.5 million. 

b. With the price floor at $1.05 per pound, consumer surplus is the area below the demand curve but above the price of $1.05: it is (($1.15 − $1.05) × 1.6 billion)/2 = $80 million.

 c. With the price floor at $1.05 per pound, producer surplus is the area above the supply curve but below the price of $1.05: it is (($1.05 − $0.85) × 1.7 billion)/2 = $170 million. 

d. The USDA buys 100 million pounds of butter at a price of $1.05 per pound, for a total of $1.05 × 100 million = $105 million.

e. Total surplus when there is a price floor is consumer surplus plus producer surplus minus the money spent by the USDA. It is $80 million + $170 million − $105 million = $145 million. 

This is less than the $247.5 million total surplus without any price support.

Chapter 5.

a. In Saudi Arabia, 1 million cars can be produced by giving up production of 200 million barrels of oil. So the opportunity cost of 1 car in Saudi Arabia is 200 barrels of oil. 

The opportunity cost of 2.5 million cars in the United States is 100 million barrels of oil, making the opportunity cost of 1 car equal to 100 million/2.5 million = 40 barrels of oil.

 The opportunity cost of 1 barrel of oil in Saudi Arabia is 0.005 of a car. The opportunity cost of 1 barrel of oil in the United States is 0.025 of a car.

 b. Since the opportunity cost of producing oil is lower in Saudi Arabia, it has the comparative advantage in oil production. 

And since the opportunity cost of producing cars is lower in the United States, it has the comparative advantage in car production.

 c. In autarky, Saudi Arabia cannot produce both more oil and more cars. If Saudi Arabia produces 200 million barrels of oil and 3 million cars, it is on its production possibility frontier.

 This means that it can produce more oil only if it produces fewer cars. The same is true for the United States.