Chapter 1 — Exercises
The first set of exercises in this book is intentionally personal. Most of them ask you to apply economic thinking to your own life, not to abstract scenarios. This is on purpose. The fastest way to become an economic thinker is to start noticing the economic structure of your own decisions.
Do at least three of these. If your course assigns more, do those. If not, the first three are the most important.
Section A — Opportunity cost
A1. Pick a non-trivial decision you made this week (deciding what to eat for lunch doesn't count; deciding which class to take, which job to apply for, which apartment to live in, or whether to take this course does). Identify, as specifically as you can, the opportunity cost of the choice you made. What was the next-best alternative you gave up? How would you describe the value of what you gave up — in dollars, in hours, in something else?
A2. A friend tells you: "Going to college is free for me — I have a full-tuition scholarship." Use the language of opportunity cost to explain why your friend is partly wrong, even though their tuition really is being paid for them. (Hint: what is your friend giving up by being in college instead of doing something else?)
A3. Maya, the student in §1.1 of the chapter, is deciding whether to cover Sarah's shift at the bistro. List four costs Maya should be considering — at least two of which are not monetary. Then list four benefits she should be considering — at least two of which are not monetary. Based on your lists, which choice would you make if you were Maya?
A4. A common piece of bad advice is "follow your passion regardless of the money." A common piece of opposite bad advice is "pick the highest-paying career regardless of what you enjoy." Use the concept of opportunity cost to explain why both pieces of advice are too simple. What would a more careful version of the question look like?
Section B — Marginal thinking
B1. Suppose you are studying for an exam. You have already studied for three hours. The exam is tomorrow morning. Use marginal thinking to describe how you should decide whether to study a fourth hour. What information would you need? What does it mean for the marginal benefit of a fourth hour to be high or low? What does it mean for the marginal cost to be high or low?
B2. A pizza shop is open from 11 a.m. to 11 p.m. The owner is considering staying open one extra hour, until midnight. Apply marginal thinking. What is the marginal benefit of staying open the extra hour? What is the marginal cost? Under what conditions would staying open be a good idea? Under what conditions would it not?
B3. "We should spend whatever it takes to make sure no child in America goes hungry." Critique this statement using marginal thinking. (Hint: the critique is not "we shouldn't try to feed hungry kids." It is about why the statement misses something.)
B4. You bought a $30 movie ticket two weeks ago for a film tonight at 8:00. At 7:30, a friend you have not seen in three years calls and says she's in town for one night and wants to have dinner. Use marginal thinking to decide what to do. Then explain how the wrong (sunk-cost) reasoning would lead you to the wrong answer.
Section C — Incentives
C1. A school district wants to reduce student tardiness. It announces a new rule: any student more than five minutes late for first period will get an automatic detention. Predict three consequences of this policy — at least one of which is unintended. How would you redesign the policy to avoid the unintended consequences?
C2. A city council wants to reduce traffic in the downtown area. Council members propose four different policies: - (a) raise the price of parking meters from $2/hr to $5/hr - (b) ban cars from a 6-block downtown area entirely - (c) charge a $10 toll for any vehicle entering downtown - (d) provide free downtown parking For each policy, predict the main behavioral response. Which policy is most likely to actually reduce traffic? Which is most likely to backfire?
C3. Find a policy in the news right now (any country, any topic) and apply the question: "What incentives does this policy create, and what behavioral responses should we expect?" Write 200–300 words on the incentives, the predicted responses, and any unintended consequences you can foresee.
C4. The "cobra effect" story (whether or not historically accurate) makes a serious point: pay people for outcomes, and they will produce the outcomes — sometimes in ways you didn't plan for. Find or invent a contemporary example of the same pattern. Health care metrics, school test scores, police arrest quotas, and corporate KPIs all have famous versions of this story.
Section D — Data lookup
D1. Go to the FRED website at the Federal Reserve Bank of St. Louis (fred.stlouisfed.org). Search for "civilian labor force participation rate" (the series ID is CIVPART). Look at the chart from 1970 to the present. Describe in two sentences what you see. What might explain the long-run pattern? What might explain the sharp dip in 2020?
D2. On FRED, search for "median household income" (one common series is MEHOINUSA672N — real median household income in the United States). Look at the chart since 1984. By approximately what percentage has real median household income grown since 1984? Is the growth steady, or are there periods of stagnation? Try to identify two recessions visible on the chart.
D3. Find a real economic chart in a recent newspaper or magazine (not on FRED itself). Apply the questions from this chapter to it: What is being shown? What are the units? What is the time period? Is anything left off the chart that would change the story if it were included? Write a paragraph evaluating the chart.
Section E — Policy debate exercises
E1. "Free higher education would allow more students to attend college." Articulate the strongest case for this position and the strongest case against it. Then identify which parts of each case are positive claims (about facts) and which are normative claims (about values). Which side of the debate would you be more sympathetic to, and why?
E2. "Raising the federal minimum wage to $20 an hour would lift millions of workers out of poverty." Articulate the strongest case for and the strongest case against. Which factual claims would you need to verify before deciding which side is right? Where would you look to verify them? (You will revisit this exercise in much more depth in Chapter 21.)
E3. A common argument runs: "X is a good policy because it creates jobs." Use opportunity cost to explain why this argument is incomplete. What would a complete version of the argument need to address?
Section F — "Economist vs. Layperson" framing
F1. Most economists believe that paying people to NOT work — for example, generous unemployment benefits — somewhat reduces how hard they search for work. Most non-economists find this claim morally offensive when stated bluntly. Articulate the economist's case (using the language of incentives) and the non-economist's case (using the language of dignity, fairness, or human experience). Where can the two views meet? What would a thoughtful policy look like?
F2. Economists generally support the use of market prices for goods that are usually given away free (organ donation, kidneys, blood plasma, scarce concert tickets). Non-economists are often horrified by these proposals. Use the four foundational ideas to articulate the economist's case. Then articulate the moral/ethical objections. Which of those objections, if any, do you find compelling?
Reflection questions (no right answer)
- After reading this chapter, what is one decision you have been thinking about lately that you would now think about differently?
- Which of the four foundational ideas (scarcity, opportunity cost, marginal thinking, incentives) was most surprising to you, and why?
- The chapter argues that economic thinking is "a lens, not a truth." Are there situations in your own life where you think the economic lens would be the wrong lens to use? When and why?
Selected answers are in appendices/answers-to-selected.md. Discuss your answers with classmates if you can — the conversation is often where the learning happens.