Solutions Manual Economics 7th Edition Paul Krugman
Microeconomics / Macroeconomics / Economics
Chapter No. 01: First Principles
1. In each of the following situations, identify which of the 11 principles is at work.
a. You choose to purchase your textbooks online rather than paying a higher price for
the same books through your college bookstore.
b. On your spring break trip, your budget is limited to $35 a day.
c. To help reduce traffic congestion, many states have adopted congestion pricing. Under
this program, drivers are charged more to use express lanes during peak rush hour.
d. Congress passes an infrastructure bill to help construction workers who were left
jobless after the last recession.
e. You buy a used textbook from your roommate. Your roommate uses the money to buy
songs from iTunes.
f. You decide how many cups of coffee to have when studying the night before an exam
by considering how much more work you can do by having another cup versus how
jittery it will make you feel.
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g. There is limited lab space available to do the project required in Chemistry 101. The
lab supervisor assigns lab time to each student based on when that student is able to
come.
h. You realize that you can graduate a semester early by forgoing a semester of study
abroad.
i. At the student center, there is a bulletin board on which people advertise used items
for sale, such as bicycles. Once you have adjusted for differences in quality, all the
bikes sell for about the same price.
j. You are better at performing lab experiments, and your lab partner is better at
writing lab reports. So the two of you agree that you will do all the experiments, and
she will write up all the reports.
k. Amazon announces a program to develop a drone delivery system in place of
traditional ground shipping.
Solution
1. a. People usually exploit opportunities to make themselves better off. In this case, you
make yourself better off by buying textbooks at a lower price.
b. Resources are scarce. Since you have only $35 a day, your resources are limited
(scarce).
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c. When markets don’t achieve efficiency, government intervention can improve
society’s welfare. During most hours of the day, traffic congestion is minimal. But
during peak hours, the roads are crowded and stretched to capacity. The cost of
traffic congestion differs for every driver, and some drivers are willing to pay to avoid
rush hour. By implementing a program that charges drivers to use an express lane,
the government can speed travel times for those willing to pay the fee, reduce traffic
for everyone by moving some drivers off the main roads, and increase revenue.
Overall, society’s welfare is improved.
d. Overall spending sometimes gets out of line with the economy’s productive capacity;
when it does, government policy can change spending. Passing an infrastructure bill
will allow more spending on the part of the construction industry, which can now
purchase additional building materials and hire more construction workers. As these
companies make their purchases and newly hired workers spend their salaries,
overall spending will increase and help the economy return to capacity.
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.
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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 them
equally well off. That is, a buyer who chooses a particular bicycle cannot change
actions and find another bicycle that makes them better off. Also, no seller can take a
different action that makes them 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 they are 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. Increases in the economy’s potential lead to economic growth over time. Increasing
the speed and efficiency of package delivery through the application of new
technologies will increase economic potential and eventually economic growth.
2. Describe some of the opportunity costs when you decide to do the following.
a. Attend college instead of taking a job
b. Watch a movie instead of studying for an exam
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