Question

Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $129 for the skirt:

Store	Travel Time Each Way	Price of a Skirt
	(Minutes)	(Dollars per skirt)
Local Department Store	15	129
Across Town	30	86
Neighboring City	60	63

Juanita makes $50 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $50 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling.

Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location.

Store	Opportunity Cost of Time	Price of a Skirt	Total Cost
	(Dollars)	(Dollars per skirt)	(Dollars)
Local Department Store		129
Across Town		86
Neighboring City		63

Assume that Juanita takes opportunity costs and the price of the skirt into consideration when she shops. Juanita will minimize the cost of the skirt if

a. store across town

b. local department store

c. store in the neighboring city

3. Equality versus efficiency

Match each definition to its appropriate concept.

Definition	Efficiency	Equality
When a society gets the most it can from its scarce resources
When economic benefits are distributed uniformly across society

All societies face a trade-off between equality and efficiency.

If the United States government raises the income taxes on the wealthiest Americans, while increasing welfare payments to the poorest Americans, the result will likely be increase or decrease    in efficiency and increase or decrease       in equality in the United States.

4. A decision at the margin

Deborah is a hard-working college junior. One Tuesday, she decides to work nonstop until she has answered 200 practice problems for her physics course. She starts work at 8:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she gets tired, it takes her longer to solve each problem.

Time	Total Problems Answered
8:00 AM	0
9:00 AM	80
10:00 AM	140
11:00 AM	180
Noon	200

Use the table to answer the following questions.

The marginal, or additional, gain from Deborah’s first hour of work, from 8:00 AM to 9:00 AM, is

problems.

The marginal gain from Deborah’s third hour of work, from 10:00 AM to 11:00 AM, is

problems.

Later, the teaching assistant in Deborah’s physics course gives her some advice. “Based on past experience,” the teaching assistant says, “working on 30 problems raises a student’s exam score by about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always cover the same number of pages during each hour they spend reading.

Given this information, in order to use her 4 hours of study time to get the best exam score possible, how many hours should she have spent working on problems, and how many should she have spent reading?

0 hours working on problems, 4 hours reading

2 hours working on problems, 2 hours reading

3 hours working on problems, 1 hour reading

4 hours working on problems, 0 hours reading

5. Changes in incentives

Suppose the large number of bike accidents in a small town results in new legislation that requires all citizens of the town to wear specialized bike helmets when riding. These new helmets reduce the probability of head trauma by 25% during a bike accident.

While the new helmets      the probability of a serious head injury resulting from a bike accident, they also incentivize cyclists to ride      safely, which could      the number of bike accidents and thus head injuries to cyclists.

6. Scarcity, opportunity cost, and marginal analysis

Kyoko is training for a triathlon, a timed race that combines swimming, biking, and running.

Consider the following sentence: In order to swim for an hour, Kyoko must take time away from work, where she earns $12 per hour. This is in addition to paying a $5 entrance fee for the pool.

Which basic principle of individual choice do these statements best illustrate?

Markets are usually a good way to organize economic activity

People usually exploit opportunities to make themselves better off.

The cost of something is what you give up to get it

Trade can make everyone better off

7. The interaction of individual choices

Megan has opened a new startup company in web design. Within the first month of business, the startup agrees to maintain an accounting firm’s website in exchange for someone doing their tax returns.

Which of the following principles of economic interaction best describes this scenario?

All costs are opportunity costs.

When markets do not achieve efficiency, government intervention can improve overall welfare.

Markets allocate goods effectively.

Trade can make everyone better off.

8. Property rights and market failures

Loggers are much   likely to supply wood to the market if property rights are not enforced.

In the presence of market failures, public policy can improve economic efficiency.

Classify the source of market failure in each case listed.

Market Failure	Market Power	Externality
A single public utilities company is responsible for supplying electricity for an entire state. As a result, the utilities company can set the price of electricity.
A person smoking in a restaurant emits second-hand smoke that harms other restaurant patrons.

9. Factors that influence standard of living

Which of the following factors explains most of the differences in standards of living among countries around the world?

Productivity

Minimum wage laws

Welfare and transfer payments

Labor unions

10. Inflation and unemployment

Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money.

This monetary policy   the economy's demand for goods and services, leading to   product prices. In the short run, the change in prices induces firms to produce   goods and services. This, in turn, leads to a   level of unemployment.

In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to   unemployment

Answer 1