1-1 Define economics. Explain briefly how the economic way of thinking—in terms of rational, self-
interested people responding to incentives—relates to each of the following situations.
A student deciding whether to purchase a text- book for a particular class
Government officials seeking more funding for mass transit through higher taxes
A municipality taxing hotel guests to obtain funding for a new sports stadium
1-15 Consider the following statements, based on a positive economic analysis that assumes all other
things remain constant. For each, list one other thing that might change and thus offset the
Increased demand for laptop computers will drive up their price.
Falling gasoline prices will result in additional vacation travel.
A reduction of income tax rates will result in more people working.
2-2 If you receive a ticket to a concert at no charge, what, if anything, is your opportunity cost of
attending the concert? How does your opportunity cost change if miserable weather on the
night of the concert requires you to leave much earlier for the concert hall and greatly
extends the time it takes to get home afterward?
2-15 You can wash, fold, and iron a basket of laundry in two hours and prepare a meal in one
hour. Your roommate can wash, fold, and iron a basket of laundry in three hours and
prepare a meal in one hour. Who has the absolute advantage in laundry, and who has an
absolute advantage in meal preparation? Who has the comparative advantage in laundry, and
who has a comparative advantage in meal preparation?
3-1 Suppose that in a recent market period, the following relationship existed between the price of
tablet devices and the quantity supplied and quantity demanded.
Graph the supply and demand curves for tablet devices using the information in the table.
What are the equilibrium price and quantity? If the industry price is $340, is there a shortage
or surplus of tablet devices? How much is the shortage or surplus?
3-7 Identify which of the following would generate an increase in the market demand for tablet
devices, which are a normal good.
A decrease in the incomes of consumers of tablet devices
An increase in the price of ultrathin computers, which are substitutes
An increase in the price of online apps, which are complements
An increase in the number of consumers in the market for tablet devices
5-4 Suppose the U.S. government determines that cigarette smoking creates social costs not
reflected in the current market price and equilibrium quantity of cigarettes. A study has
recommended that the government can correct for the externality effect of cigarette
consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also
recommends raising the funds to make these payments by increasing taxes on cigarettes.
Assuming that the government is correct that cigarette smoking creates external costs,
evaluate whether the study’s recommended policies might help correct this negative
5-12 After a government implements a voucher program, granting funds that families can spend at
schools of their choice, numerous students in public schools switch to private schools. The
program’s per-unit subsidy is exactly equal to the external benefit from private educational
services. Is anyone likely to lose out nonetheless? If so, who?
6-2 For purposes of assessing income taxes, there are three official income levels for workers in a
small country: high, medium, and low. For the last hour on the job during a 40-hour
workweek, a high income worker pays a marginal income tax rate of 15 percent, a medium-
income worker pays a marginal tax rate of 20 percent, and a low-income worker is assessed a
25 percent marginal income tax rate. Based only on this information, does this nation’s
income tax system appear to be progressive, proportional, or regressive?
6-6 The sales tax rate applied to all purchases within a state was 0.04 (4 percent) throughout 2016
but increased to 0.05 (5 percent) during all of 2017. The state government collected all taxes
due, but its tax revenues were equal to $40 million each year. What happened to the sales tax
base between 2016 and 2017? What could account for this result?