Ten Principles of Economics

Groupings Activity
Outcomes Evaluation: 20 pts
1. Describe some of the tradeoffs faced by the following:
a. a family deciding whether to buy a new car.
b. a member of Congress deciding how much to spend on national parks.
c. a company president deciding whether to open a new factory.
d. a professor deciding how much to prepare for class.
2. You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare,
hotel, 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 that you had been planning to spend
the day studying at the library. What is the cost of going skiing in this case? Explain.
5. Your roommate is a better cook than you are, but you can clean more quickly than your
roommate can. If your roommate did all of the cooking and you did all of 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.
6. Explain whether each of the following government activities is motivated by a concern about
equity or a concern about efficiency. In the case of efficiency, discuss the type of market failure
involved.
a. regulating cable-TV prices.
b. providing some poor people with vouchers that can be used to buy food.
c. prohibiting smoking in public places.
d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several
smaller companies.
e. imposing higher personal income tax rates on people with higher incomes.
f. instituting laws against driving while intoxicated.

1. a. Family deciding whether to buy a new car

- Tradeoff between buying a new car and maintaining their current financial stability.
- Tradeoff between buying a new car with the latest features versus a used car with lower initial costs
but potentially higher maintenance needs.
b. Member of Congress deciding how much to spend on national parks
- Tradeoff between allocating funds to national parks and other government priorities such as
education, healthcare, or defense spending.
- Tradeoff between funding for national parks and other environmental or conservation initiatives.
c. Company president deciding whether to open a new factory
- Tradeoff between the initial investment cost of opening a new factory and potential long-term
profitability.
- Tradeoff between investing in a new factory and other strategic initiatives such as research and
development or marketing.
d. Professor deciding how much to prepare for class
- Tradeoff between investing time in preparing high-quality lectures and materials versus allocating
time to research, administrative tasks, or personal activities.
- Tradeoff between providing theoretical knowledge and practical applications in class.
2. To compare the benefits of a vacation (psychological) to its costs (measured in dollars), one could use
subjective valuation techniques such as assigning monetary values to psychological benefits based on
personal preferences and experiences. For example, one could estimate the value of relaxation, stress
reduction, or enjoyment gained from the vacation and compare it to the monetary costs incurred.

3. The true cost of going skiing when initially planning to work at a part-time job includes the
opportunity cost of forgone wages from not working, as well as any additional expenses incurred for
skiing such as lift tickets, equipment rental, and transportation. If planning to study at the library, the
cost of going skiing would include the opportunity cost of lost study time and the potential impact on
academic performance or future opportunities.

4. If your roommate did all of the cooking and you did all of the cleaning, your chores would likely take
less time overall compared to dividing each task evenly. Specialization and trade allow each person to
focus on their comparative advantage, resulting in more efficient task completion. Similarly, in
international trade, countries can specialize in producing goods or services where they have a
comparative advantage, leading to increased overall productivity and mutual benefit.

5. If your roommate specializes in cooking and you specialize in cleaning, it's likely that your chores
would take less time overall compared to dividing each task evenly. This is because specialization allows
each person to focus on their comparative advantage, resulting in more efficient task completion.
Similarly, in international trade, countries can specialize in producing goods or services where they have
a comparative advantage, leading to increased overall productivity and mutual benefit.

A. Regulating cable-TV prices: This activity is motivated by a concern about equity, as it aims to ensure
fair pricing and access to cable TV services for consumers. The market failure involved is potentially
monopolistic practices or lack of competition leading to inflated prices.
B. Providing vouchers for food: Motivated by a concern about equity, as it aims to address food
insecurity and ensure basic needs are met for low-income individuals. The market failure involved is
income inequality leading to unequal access to food.
C. Prohibiting smoking in public places: Motivated by efficiency (public health), as it aims to reduce
negative externalities such as secondhand smoke exposure and healthcare costs associated with
smoking-related illnesses. The market failure involved is negative externalities from smoking.
D. Breaking up Standard Oil: Motivated by both efficiency and equity concerns, as it aims to promote
competition, prevent monopolistic practices, and ensure fair market access for other oil companies. The
market failure involved is monopoly power leading to reduced competition and potential exploitation of
consumers.
E. Imposing higher personal income tax rates on higher incomes: Motivated by equity, as it aims to
redistribute wealth and reduce income inequality. The market failure involved is income inequality and
potential concentration of wealth.
F. Instituting laws against driving while intoxicated: Motivated by efficiency (public safety), as it aims to
reduce accidents, injuries, and fatalities caused by impaired driving. The market failure involved is
negative externalities from impaired driving.