Ten Principles of Economics

Class Activity 1:
You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute,
the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the
following scenarios, should you have the transmission repaired?
A. Blue book value is $6500 if transmission works, $5700 if it doesn’t
B. Blue book value is $6000 if transmission works, $5500 if it doesn’t
Discussion Questions:
In each of the following situations, what is the government’s role? Does the government’s
intervention improve the outcome?
a. Public schools for K-12
b. Workplace safety regulations
c. Public highways
d. Patent laws, which allow drug companies to charge high prices for life-saving drugs.
Q. You win $100 in a basketball pool. You have a choice between spending the money now
or putting it away for a year in a bank account that pays 5 percent interest. What is the
opportunity cost of spending the $100 now?
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Q. 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