You
My Name is? ________________________________________
Introduction
Q1. We live in a world of ___________ ?
A1. “Scarcity”
Q2. What did Alfred Marshall say about economics?
A2. “Economics is the study of mankind in the ordinary business of life.”
Principle 1 – People face tradeoffs
Q3. What is Eric’s daily challenge?
A3. How to spend his time.
Q4. The tradeoff between defense and funding consumer goods is described as the tradeoff between…
A4. “Guns and Butter”
Q5. The miner describes a tradeoff between cleaner air and what?
A5. “Jobs”
Principles of Microeconomics 1 Problem Set Number 1

Principle 2 – The Cost of Something is What You Give Up to Get It.
Q6. What does Prof. Mankiw describe as being what you are giving up to go to college?
A6. “The lost wages that you could have otherwise earned.”
Q7. The opportunity cost of going to college is described as being low because the alternative would be a….
A7. Low paying entry level job.
Q8. What would Kobe Bryant have given up if he had decided to go to college?
A8. “a several million dollar a year salary”
Principle 3 – Rational People Think at the Margin.
Q9. How does Jedawn make her best decisions?
A9. “by thinking at the margin”
Q10. Economists assume that rational people will only act if the marginal benefit of an action exceeds the?
A10. “Marginal Cost”
Principle 4 – People Respond To Incentives.
Q11. Why do Europeans drive very small cars?
A11. They are heavily taxed on their gasoline.
Q12. What does President Clinton describe as being “one of the surest ways of reducing new smoking”?
A12. “is to increase the price of cigarettes”.
Principles of Microeconomics 2 Problem Set Number 1

Q13. What unintended consequence resulted from the mandatory use of safety belts.
A13. “people drive less safely”.
Principle 5 – Trade can Make Everyone Better Off.
Q14. Would it be as efficient for us all to grow our own food in our own back yard as it is to have a small number of farmers producing using high levels of technology? Yes or No?
A14. No, it would not be as efficient.
Q15. “Specialization” is said to allow “everyone, farmers and non-farmers to achieve…?
A15. “a higher standard of living”.
Principle 6 – Markets are Usually a Good Way to Organize Economic
Activity.
Q16. Resources are allocated through the decisions of millions of firms and millions of …?
A16. Households.
Q17. What do Firms decide?
A17. “They decide what to make and who to hire.”
Q18. If you have a catcher’s mitt and I have $25 and I want to buy the catcher’s mitt for $25 and you want to sell it to me, then what is the outcome that is described?
A18. “we both win”.
Principle 7 – Government Can Sometimes Improve Market Outcomes
Q19. One reason that markets may fail to work efficiently is described as being due to an …?
A19. “Externality”
Principles of Microeconomics 3 Problem Set Number 1

Q20. Market power occurs when one of the players in a market either a firm or a person who is selling her services, is large relative to the market and is able to control some part of the market and manipulate …?
A20. “Prices”
Principle 8 – A Country’s Standard of Living Depends on its Ability to
Produce Goods and Services.
Q21. What was the yearly per capita income of the average American in 1998?
The average Mexican?
The average Indian?
A21. $31,500 $8,300 $1,700
Q22. Why is the government concerned about the quality of education? Because of its impact on …?
A22. Skills and productivity.
Principle 9 – Prices Rise When the Government Prints Too Much Money.
Q23. As money becomes more available, its value shrinks and …?
A23. Prices rise.
Principle 10 – Society Faces a Short-Run Tradeoff Between Inflation and
Unemployment.
Q24. The Role of the Chairman of the Federal Reserve Bank is to keep inflation under control and also ensure that …?
A24. “Unemployment stays low”.
Principles of Microeconomics 4 Problem Set Number 1

Additional Homework Question
From The Text Page 18: Question 16:
Look at a newspaper or at the Web site http://www.Economist.Com to find three stories about the economy that have been in the news lately. For each story, identify one (or more) of the Ten Principles of Economics discussed in this chapter that is relevant, and explain how it is relevant. Also, for each story, look through this book's table of contents and try to find a chapter that might shed light on the news event.
Principles of Microeconomics 5 Problem Set Number 1