CHAPTER 1
Modern Principles of Economics:
The Big Ideas
Facts and Tools
1. A headline in the New York Times read: “Study Finds Enrollment Is Up at Colleges Despite Recession.”
How would you rewrite this headline now that you understand the idea of opportunity cost?
Solution
1. The easiest change is to switch “despite” to “because of.” Ordinary people focus on the fact that
when times are tough, people can’t afford college. Economists, on the other hand, see that there is an
opposing effect: when times are tough the price (or opportunity cost) of attending college is low.
There’s some truth to both viewpoints. It’s tough for you or your parents to pay for tuition when jobs
are hard to come by and income is low, but, as you learned, in the real world it’s actually quite common
for students to flood colleges during recessions. That means that the price effect usually dominates.
2. When bad weather in India destroys the crop, does this sound like a fall in the total “supply” of crops
or a fall in people’s “demand” for crops? Keep your answer in mind as you learn about economic booms
and busts later on.
Solution
2. It sounds like a fall in supply.
3. How much did national output fall during the Great Depression? According to the chapter, which
government agency might have helped to avoid much of the Great Depression had it acted more quickly
and appropriately?
Solution
3. Output fell by about 30 percent and much of the blame belongs to the Federal Reserve for failing to
act.
4. The chapter lists four things that entrepreneurs save and invest in. Which of the four are actual
objects, and which are more intangible, like concepts or ideas or plans? Feel free to use Wikipedia or
some other reference source to get definitions of unfamiliar terms.
Solution
4. Physical capital is the object, while human capital (education), innovation, and efficient organization
are more like concepts, ideas, or plans.
5. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a
scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist
who will get a handshake and a thank you note from her boss if she invents a new medicine?
Modern Principles of Economics:
The Big Ideas
Facts and Tools
1. A headline in the New York Times read: “Study Finds Enrollment Is Up at Colleges Despite Recession.”
How would you rewrite this headline now that you understand the idea of opportunity cost?
Solution
1. The easiest change is to switch “despite” to “because of.” Ordinary people focus on the fact that
when times are tough, people can’t afford college. Economists, on the other hand, see that there is an
opposing effect: when times are tough the price (or opportunity cost) of attending college is low.
There’s some truth to both viewpoints. It’s tough for you or your parents to pay for tuition when jobs
are hard to come by and income is low, but, as you learned, in the real world it’s actually quite common
for students to flood colleges during recessions. That means that the price effect usually dominates.
2. When bad weather in India destroys the crop, does this sound like a fall in the total “supply” of crops
or a fall in people’s “demand” for crops? Keep your answer in mind as you learn about economic booms
and busts later on.
Solution
2. It sounds like a fall in supply.
3. How much did national output fall during the Great Depression? According to the chapter, which
government agency might have helped to avoid much of the Great Depression had it acted more quickly
and appropriately?
Solution
3. Output fell by about 30 percent and much of the blame belongs to the Federal Reserve for failing to
act.
4. The chapter lists four things that entrepreneurs save and invest in. Which of the four are actual
objects, and which are more intangible, like concepts or ideas or plans? Feel free to use Wikipedia or
some other reference source to get definitions of unfamiliar terms.
Solution
4. Physical capital is the object, while human capital (education), innovation, and efficient organization
are more like concepts, ideas, or plans.
5. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a
scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist
who will get a handshake and a thank you note from her boss if she invents a new medicine?
