,SOLUTION MANUAL FOR Microeconomics, 9th
edition Glenn Hubbard
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,CHAPTER 1 | Economics: Foundations
and Models
Brief Chapter Summary and Learning Objectives
1.1 Three Key Economic Ideas, page 4
Explain these three key economic ideas: People are rational, people respond to economic
incentives, and optimal decisions are made at the margin.
▪ Because resources are scarce, people must make choices to attain their goals.
1.2 The Economic Problem That Every Society Must Solve, page 9
Discuss how an economy answers these questions: What goods and services will be produced?
How will the goods and services be produced? Who will receive the goods and services
produced?
▪ Because of scarcity, producing more of one good or service means that less of some other good
or service will be produced.
1.3 Economic Models, page 10
Explain how economists use models to analyze economic events and government policies.
▪ Economists use models—simplified versions of reality—to analyze real-world issues.
1.4 Microeconomics and Macroeconomics, page 12
Distinguish between microeconomics and macroeconomics.
▪ Microeconomics is the study of how households and firms make choices, while
macroeconomics is the study of the economy as a whole
1.5 Economic Skills and Economics as a Career, page 13
Describe economics as a career and the key skills you can gain from studying economics.
▪ Individuals, managers, and government policymakers can all benefit from applying economic
concepts when they make decisions.
1.6 A Preview of Important economic Terms, page 13
Define important economic terms.
Appendix: Using Graphs and Formulas, page 14
Use graphs and formulas to analyze economic situations.
Copyright © 2025 Pearson Education, Inc.
,2 CHAPTER 1 | Economics: Foundations and Models
Key Terms
Allocative efficiency, p. 8 A state of the interact in markets determine the allocation of
economy in which production is in accordance economic resources.
with consumer preferences; in particular, every
good or service is produced up to the point Microeconomics, p. 12 The study of how
where the last unit provides a marginal benefit to households and firms make choices, how they
consumers equal to the marginal cost of interact in markets, and how the government
producing it. attempts to influence their choices.
Centrally planned economy, p. 8 An economy Mixed economy, p. 8 An economy in which
in which the government decides how economic most economic decisions result from the
resources will be allocated. interaction of buyers and sellers in markets but
in which the government plays a significant role
Economic model, p. 10 A simplified version in the allocation of resources.
of reality used to analyze real-world economic
situations. Normative analysis, p. 11 Analysis concerned
with what ought to be.
Economic variable, p. 11 Something
measurable that can have different values, such Opportunity cost, p. 7 The highest-valued
as the number of people employed in alternative that must be given up to engage in an
manufacturing. activity.
Economics, p. 4 The study of the choices people Positive analysis, p. 11 Analysis concerned
make to attain their goals, given their scarce with what is.
resources.
Productive efficiency, p. 8 A state of the
Equity, p. 8 The fair distribution of economic economy in which every good or service is
benefits. produced at the lowest possible cost.
Macroeconomics, p. 12 The study of the Scarcity, p. 4 A situation in which unlimited
economy as a whole, including topics such as wants exceed the limited resources available to
inflation, unemployment, and economic growth. fulfill those wants.
Marginal analysis, p. 4 Analysis that involves Trade-off, p. 7 The idea that, because of
comparing marginal benefits and marginal costs. scarcity, producing more of one good or service
means producing less of another good or service.
Market, p. 4 A group of buyers and sellers of a
good or service and the institution or Voluntary exchange, p. 8 A situation that
arrangement by which they come together to occurs in markets when both the buyer and the
trade. seller of a product are made better off by the
transaction.
Market economy, p. 8 An economy in which
the decisions of households and firms as they
Copyright © 2025 Pearson Education, Inc.
, CHAPTER 1 | Economics: Foundations and Models 3
Chapter Outline
Should Apple Manufacture the iPhone in the United States?
Although Apple designs the iPhone at its headquarters in Cupertino, California, most iPhones are assembled
in China. Many products that were once manufactured in the United States are now manufactured overseas.
Tariffs lead to higher prices for imported goods, making it more likely that U.S. and foreign companies will
manufacture goods in the United States. In the summer of 2022 Congress passed the Chips and Science Act
of 2022, which included $53 billion in federal government assistance to private firms that construct new
semiconductor factories in the United States or to expand existing factories. In a market system, firms
respond to economic incentives. In the case of Apple, lower wages earned by Chinese workers reduce the
costs of assembling iPhones. Technological progress often creates incentives for firms to change how they
produce goods and services. Firms also respond to changes in consumer tastes. When more people began
using smartphones rather than computers, they reduced their demand for computers. Firms like Apple
responded by shifting resources from producing computers in order to produce smartphones.
Teaching Tips
Here are special features in the textbook:
1. The introduction, or chapter opener, uses a real-world business example to preview the economic issues
discussed in the chapter. Examples within the chapter often link back to that chapter-opening example.
A video of each chapter opener appears within MyLab Economics and the eText.
2. At the end of each of the first four textbook chapters is a feature titled An Inside Look that consists of
a recent news article plus analysis, graph, and questions. The article links back to a topic discussed in
the chapter opener. Visit MyLab Economics for additional current news articles.
3. A boxed feature titled Economics in Your Life & Career complements the business example that opens
the chapter. This feature poses questions that help students make a personal connection with the chapter
theme. At the end of the chapter, the authors use the concepts described in the chapter to answer these
questions. Extra Economics in Your Life & Career features are included in select chapters of this
Instructor’s Manual.
4. A boxed feature titled Don’t Let This Happen to You alerts students to common pitfalls covered in that
chapter.
5. There are between two and four Apply the Concept features in each chapter that provide real-world
reinforcement of key concepts by citing news stories that focus on business and policy issues. A video
of each Apply the Concept appears within MyLab Economics and the eText. Extra Apply the Concept
features appear in this Instructor’s Manual.
6. Solved Problems use a step-by-step process for solving economic problems. Extra Solved Problems are
included in this Instructor’s Manual.
7. Real-Time Data (RTDA) Exercises are included with problems at the end of macroeconomics chapters.
These exercises refer to data and graphs that students will find at the web site of the Federal Reserve
Bank of St. Louis (FRED). Many exercises require more elaborate calculations than other problems
and the use of Excel spreadsheets.
You can use these features as the basis for classroom discussion, homework assignments, and
examination questions.
Copyright © 2025 Pearson Education, Inc.
,4 CHAPTER 1 | Economics: Foundations and Models
Teaching Tips
Hubbard/O’Brien Blog
Visit http://hubbardobrieneconomics.com for the following updates for instructors and students:
● Frequently posted podcast recordings with authors Glenn Hubbard and Tony O’Brien, and occasional
guests, discussing key economic topics in the news
● New Apply the Concepts and Solved Problems, with assessment questions
Hubbard/O’Brien on Twitter
Instructors and students can follow the authors on X (formerly Twitter):
https://twitter.com/o_economics
People must make choices as they try to attain their goals. The choices people make represent the trade-
offs made necessary by scarcity. Scarcity is a situation in which unlimited wants exceed the limited
resources available to fulfill those wants. Economics is the study of the choices people make to attain their
goals, given their scarce resources.
Teaching Tips
Students will better understand what scarcity means if given examples of things that are not scarce. Suggest
examples of “free” resources—sand on a beach and fresh air—and ask your students to contribute their own
examples. They will soon realize that the list of free resources is much shorter than the list of scarce
resources.
Three Key Economic Ideas
1.1 Learning Objective: Explain these three key economic ideas: People are rational, people
respond to economic incentives, and optimal decisions are made at the margin.
A market is a group of buyers and sellers of a good or service and the institution or arrangement by which
they come together to trade.
A. People Are Rational
Rational consumers and firms use all available information as they act to achieve their goals. Although not
everyone behaves rationally all the time, the assumption of rational behavior is useful in explaining most
of the choices people make.
B. People Respond to Economic Incentives
Economists emphasize that individuals and firms consistently respond to economic incentives.
C. Optimal Decisions Are Made at the Margin
Economists use the word marginal to mean an extra or additional benefit or cost from making a decision.
The optimal decision is to continue any activity to the point where the marginal benefit equals the marginal
cost. Marginal analysis is analysis that involves comparing marginal benefits and marginal costs.
Copyright © 2025 Pearson Education, Inc.
, CHAPTER 1 | Economics: Foundations and Models 5
Extra Solved Problem 1.1A
A Doctor Makes a Decision at the Margin
A doctor receives complaints from patients that her office isn’t open enough hours. In response, the doctor
asks her office manager to analyze the effect of keeping her office open 9 hours per day rather than 8 hours.
The doctor’s office manager tells her: “Keeping the office open an extra hour is a good idea because the
revenue from your practice will increase by $300,000 per year when the office is open 9 hours per day.”
Do you agree with the office manager’s reasoning? What, if any, additional information would you need to
decide whether the doctor should keep her office open an additional hour per day?
Solving the Problem
Step 1: Review the chapter material. This problem is about making decisions, so you may want to
review the section “Optimal Decisions Are Made at the Margin” in the textbook.
Step 2: Explain whether you agree with the office manager’s reasoning. We have seen that any
activity should be continued to the point where the marginal benefit is equal to the marginal
cost, MB = MC. In this case, the doctor should keep her office open up to the point where the
additional revenue she receives from seeing more patients is equal to the marginal cost of
keeping her office open an additional hour. The office manager has provided information on
marginal revenue but not on marginal cost. The office manager has not provided enough
information to make a decision, so you should not agree with the office manager’s reasoning.
Step 3: Explain what additional information you need. To make a correct decision, you would need
information on the marginal cost of remaining open an extra hour per day. The marginal cost
would include the additional salary to be paid to the office staff, any additional medical supplies
that would be used, as well as any additional electricity or other utilities. The doctor would also
need to take into account the nonmonetary cost of spending another hour working rather than
spending time with her family and friends or in other leisure activities. The marginal revenue
would depend on how many more patients the doctor can see in the extra hour. The doctor
should keep her office open an additional hour if the marginal revenue of doing so is greater
than the marginal cost. If the marginal cost is greater than the marginal revenue, then the doctor
should continue to keep her office open for 8 hours.
Extra Analyze
the Concept Does Health Insurance Give People an Incentive to Become
Obese?
Obesity is a factor in a variety of diseases, including heart disease, stroke, diabetes, and hypertension,
making it a significant health problem in the United States. Body mass index (BMI) is a measurement of a
person’s weight relative to the person’s height. According to the U.S. Centers for Disease Control and
Prevention (CDC), an adult with a BMI of 30 or greater is considered obese. For example, a 5'6" adult with
a BMI of 30 is 40 pounds overweight.
Copyright © 2025 Pearson Education, Inc.
,6 CHAPTER 1 | Economics: Foundations and Models
The following two maps show the dramatic increase in obesity between 1994 and 2015. In 1994, in a
majority of states only between 10 percent and 14 percent of the adult population was obese, and in no state
was more than 20 percent of the adult population obese.
By 2015, in every state, at least 20 percent of the adult population was obese, and in 44 states, at least 25
percent of the adult population was obese. Many people who suffer from obesity have underlying medical
conditions. For these people, obesity is a medical problem that they cannot control. The fact that obesity
has increased, though, indicates that for some people, obesity is the result of diet and lifestyle choices.
Potential explanations for the increase in obesity include greater intake of high-calorie fast foods,
insufficient exercise, and a decline in the physical activity associated with many jobs. The CDC
recommends that teenagers get a minimum of 60 minutes of aerobic exercise per day, a standard that only
15 percent of high school students meet. In 1960, 50 percent of jobs in the United States required at least
moderate physical activity. Today, only 20 percent of jobs do. As a result, a typical worker today who may
work at a computer is burning off about 130 fewer calories per workday than a worker in the 1960s who
was more likely to have worked in a manufacturing plant.
In addition to eating too much and not exercising enough, could having health insurance be a cause of
obesity? Obese people tend to suffer more medical problems and so incur higher medical costs. Obese
people with health insurance that will reimburse them for only part of their medical bills, or who have no
health insurance, must pay some or all of these higher medical bills themselves. People with health
insurance that covers most of their medical bills will not suffer as large a monetary cost from being obese.
In other words, by reducing some of the costs of obesity, health insurance may give people an economic
incentive to gain weight.
At first glance, this argument may seem implausible. Some people suffer from medical conditions that can
make physical activity difficult or that can cause weight gain even with moderate eating, so these people
may become obese, regardless of which type of health insurance they have. The people who are obese
because of poor eating habits or lack of exercise probably don’t consider health insurance when deciding
whether to have a slice of chocolate cake or to watch Netflix instead of going to the gym. But if economists
are correct about the importance of economic incentives, then we would expect that if we hold all other
personal characteristics—such as age, gender, and income—constant, people with health insurance will be
more likely to be overweight than people without health insurance.
Jay Bhattacharya and Kate Bundorf of Stanford University, Noemi Pace of the University of Venice, and
Neeraj Sood of the University of Southern California, have analyzed the effects of health insurance on
weight. Using a sample that followed nearly 80,000 people from 1989 to 2004, they found that after
Copyright © 2025 Pearson Education, Inc.
, CHAPTER 1 | Economics: Foundations and Models 7
controlling for factors including age, gender, income, education, and race, people with health insurance
were significantly more likely to be overweight than people without health insurance. Having private health
insurance increased BMI by 1.3 points. Having public health insurance, such as Medicaid, which is a
program under which the government provides health care to low-income people, increased BMI by 2.3
points. These findings do not mean that health insurance is the sole cause, or even the most important cause,
of obesity. The findings do suggest that people respond to economic incentives even when making decisions
about what they eat and how much they exercise. In Section 1.3, we will see that economists modify
conclusions as they collect additional data.
Note: The exact formula for the body mass index is BMI = (Weight in pounds/Height in inches2) x 703.
Sources: Centers for Disease Control and Prevention, “Prevalence of Self-Reported Obesity among U.S. Adults,” www.cdc. gov;
Katherine M. Flegal, Margaret D. Carroll, Cynthia L. Ogden, and Lester R. Curtin, “Prevalence and Trends in Obesity among U.S.
Adults, 1999–2008,” Journal of the American Medical Association, Vol. 303, No. 3, January 20, 2010, pp. 235–241; Jay
Bhattacharya, Kate Bundorf, Noemi Pace, and Neeraj Sood, “Does Health Insurance Make You Fat?” in Michael Grossman and
Naci H. Mocan, eds., Economic Aspects of Obesity, Chicago: University of Chicago Press, 2011; and Tara Parker-Pope, “Less
Active at Work, Americans Have Packed on Pounds,” New York Times, May 25, 2011.
Teaching Tips
Instructors do not need to spend a lot of class time explaining the material in Section 1.1; subsequent
chapters will reinforce students’ understanding of markets and the three key economic ideas.
The Economic Problem That Every Society Must Solve
Learning Objective: Discuss how an economy answers these questions: What goods and
1.2 services will be produced? How will the goods and services be produced? Who will receive
the goods and services produced?
Every society faces the economic problem that it has only a limited amount of economic resources, so it
can produce only a limited amount of goods and services. Every society faces trade-offs. A trade-off is the
idea that, because of scarcity, producing more of one good or service means producing less of another good
or service. Every activity has an opportunity cost: The highest-valued alternative that must be given up to
engage in an activity. Trade-offs force society to answer three fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
A. What Goods and Services Will Be Produced?
The answer to this question is determined by the choices consumers, managers of firms, and government
policymakers make. Each choice made has an opportunity cost.
B. How Will the Goods and Services Be Produced?
Firms choose how to produce the goods and services they sell. For example, firms often face trade-offs
between using more workers or more machines.
C. Who Will Receive the Goods and Services Produced?
In the United States, who receives the goods and services produced depends largely on how income is
distributed. An important policy question is whether the government should intervene to make the
distribution of income more equal.
Copyright © 2025 Pearson Education, Inc.
, 8 CHAPTER 1 | Economics: Foundations and Models
D. Centrally Planned Economies versus Market Economies
Societies organize their economies in two main ways. A centrally planned economy is an economy in
which the government decides how economic resources will be allocated. A market economy is an
economy in which the decisions of households and firms interacting in markets determine the allocation of
economic resources. Today, only North Korea has a completely centrally planned economy. In a market
economy, the income of an individual is determined by the payments he or she receives for what he or she
sells. Generally, the more extensive the training your receive and the longer the hours you work, the higher
your income will be.
E. The Modern “Mixed” Economy
The high rates of unemployment and business bankruptcies during the Great Depression of the 1930s caused
a dramatic increase in government intervention in the economy of the United States and other market
economies. Some government intervention is designed to raise the incomes of the elderly, the sick, and
people with limited skills. In recent years, government intervention has expanded to meet goals such as
protection of the environment, promotion of civil rights, and increased access to medical care.
Some economists argue that the extent of government intervention makes it more accurate to refer to the
economies of the United States, Canada, Japan and Western Europe as mixed economies rather than pure
market economies. A mixed economy is an economy in which most economic decisions result from the
interaction of buyers and sellers in markets but in which the government plays a significant role in the
allocation of resources.
F. Efficiency and Equity
Market economies tend to be more efficient than centrally planned economies. There are two types of
efficiency. Productive efficiency is a state of the economy in which every good or service is produced at
the lowest possible cost. Allocative efficiency is a state of the economy in which production is in
accordance with consumer preferences; in particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Voluntary exchange is a situation that occurs in markets when both the buyer and the seller of a product
are made better off by the transaction.
Inefficiency arises from various sources. Sometimes governments reduce efficiency by interfering with
voluntary exchange in markets. The production of some goods damages the environment when firms ignore
the costs of environmental damage. In this case, government intervention can increase efficiency.
Society may not find an efficient economic outcome to be desirable. Many people prefer economic
outcomes they consider fair or equitable⸻even if these outcomes are less efficient. Equity is the fair
distribution of economic benefits. There is often a trade-off between efficiency and equity.
Teaching Tips
Ask students for examples of government regulation of private markets in the United States. Responses
may include: (1) restrictions on the number of diners allowed in a restaurant during a pandemic; (2) making
the sale of addictive drugs such as cocaine and heroin illegal; (3) minimum age requirements for the
purchase of alcoholic beverages and cigarettes; and (4) the prohibition of the sale of new drugs before their
effectiveness is demonstrated through government supervised tests. Ask students whether one of these
examples of government regulation promotes equity or fairness. The difficulty in defining equity will be
apparent.
Copyright © 2025 Pearson Education, Inc.
edition Glenn Hubbard
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,CHAPTER 1 | Economics: Foundations
and Models
Brief Chapter Summary and Learning Objectives
1.1 Three Key Economic Ideas, page 4
Explain these three key economic ideas: People are rational, people respond to economic
incentives, and optimal decisions are made at the margin.
▪ Because resources are scarce, people must make choices to attain their goals.
1.2 The Economic Problem That Every Society Must Solve, page 9
Discuss how an economy answers these questions: What goods and services will be produced?
How will the goods and services be produced? Who will receive the goods and services
produced?
▪ Because of scarcity, producing more of one good or service means that less of some other good
or service will be produced.
1.3 Economic Models, page 10
Explain how economists use models to analyze economic events and government policies.
▪ Economists use models—simplified versions of reality—to analyze real-world issues.
1.4 Microeconomics and Macroeconomics, page 12
Distinguish between microeconomics and macroeconomics.
▪ Microeconomics is the study of how households and firms make choices, while
macroeconomics is the study of the economy as a whole
1.5 Economic Skills and Economics as a Career, page 13
Describe economics as a career and the key skills you can gain from studying economics.
▪ Individuals, managers, and government policymakers can all benefit from applying economic
concepts when they make decisions.
1.6 A Preview of Important economic Terms, page 13
Define important economic terms.
Appendix: Using Graphs and Formulas, page 14
Use graphs and formulas to analyze economic situations.
Copyright © 2025 Pearson Education, Inc.
,2 CHAPTER 1 | Economics: Foundations and Models
Key Terms
Allocative efficiency, p. 8 A state of the interact in markets determine the allocation of
economy in which production is in accordance economic resources.
with consumer preferences; in particular, every
good or service is produced up to the point Microeconomics, p. 12 The study of how
where the last unit provides a marginal benefit to households and firms make choices, how they
consumers equal to the marginal cost of interact in markets, and how the government
producing it. attempts to influence their choices.
Centrally planned economy, p. 8 An economy Mixed economy, p. 8 An economy in which
in which the government decides how economic most economic decisions result from the
resources will be allocated. interaction of buyers and sellers in markets but
in which the government plays a significant role
Economic model, p. 10 A simplified version in the allocation of resources.
of reality used to analyze real-world economic
situations. Normative analysis, p. 11 Analysis concerned
with what ought to be.
Economic variable, p. 11 Something
measurable that can have different values, such Opportunity cost, p. 7 The highest-valued
as the number of people employed in alternative that must be given up to engage in an
manufacturing. activity.
Economics, p. 4 The study of the choices people Positive analysis, p. 11 Analysis concerned
make to attain their goals, given their scarce with what is.
resources.
Productive efficiency, p. 8 A state of the
Equity, p. 8 The fair distribution of economic economy in which every good or service is
benefits. produced at the lowest possible cost.
Macroeconomics, p. 12 The study of the Scarcity, p. 4 A situation in which unlimited
economy as a whole, including topics such as wants exceed the limited resources available to
inflation, unemployment, and economic growth. fulfill those wants.
Marginal analysis, p. 4 Analysis that involves Trade-off, p. 7 The idea that, because of
comparing marginal benefits and marginal costs. scarcity, producing more of one good or service
means producing less of another good or service.
Market, p. 4 A group of buyers and sellers of a
good or service and the institution or Voluntary exchange, p. 8 A situation that
arrangement by which they come together to occurs in markets when both the buyer and the
trade. seller of a product are made better off by the
transaction.
Market economy, p. 8 An economy in which
the decisions of households and firms as they
Copyright © 2025 Pearson Education, Inc.
, CHAPTER 1 | Economics: Foundations and Models 3
Chapter Outline
Should Apple Manufacture the iPhone in the United States?
Although Apple designs the iPhone at its headquarters in Cupertino, California, most iPhones are assembled
in China. Many products that were once manufactured in the United States are now manufactured overseas.
Tariffs lead to higher prices for imported goods, making it more likely that U.S. and foreign companies will
manufacture goods in the United States. In the summer of 2022 Congress passed the Chips and Science Act
of 2022, which included $53 billion in federal government assistance to private firms that construct new
semiconductor factories in the United States or to expand existing factories. In a market system, firms
respond to economic incentives. In the case of Apple, lower wages earned by Chinese workers reduce the
costs of assembling iPhones. Technological progress often creates incentives for firms to change how they
produce goods and services. Firms also respond to changes in consumer tastes. When more people began
using smartphones rather than computers, they reduced their demand for computers. Firms like Apple
responded by shifting resources from producing computers in order to produce smartphones.
Teaching Tips
Here are special features in the textbook:
1. The introduction, or chapter opener, uses a real-world business example to preview the economic issues
discussed in the chapter. Examples within the chapter often link back to that chapter-opening example.
A video of each chapter opener appears within MyLab Economics and the eText.
2. At the end of each of the first four textbook chapters is a feature titled An Inside Look that consists of
a recent news article plus analysis, graph, and questions. The article links back to a topic discussed in
the chapter opener. Visit MyLab Economics for additional current news articles.
3. A boxed feature titled Economics in Your Life & Career complements the business example that opens
the chapter. This feature poses questions that help students make a personal connection with the chapter
theme. At the end of the chapter, the authors use the concepts described in the chapter to answer these
questions. Extra Economics in Your Life & Career features are included in select chapters of this
Instructor’s Manual.
4. A boxed feature titled Don’t Let This Happen to You alerts students to common pitfalls covered in that
chapter.
5. There are between two and four Apply the Concept features in each chapter that provide real-world
reinforcement of key concepts by citing news stories that focus on business and policy issues. A video
of each Apply the Concept appears within MyLab Economics and the eText. Extra Apply the Concept
features appear in this Instructor’s Manual.
6. Solved Problems use a step-by-step process for solving economic problems. Extra Solved Problems are
included in this Instructor’s Manual.
7. Real-Time Data (RTDA) Exercises are included with problems at the end of macroeconomics chapters.
These exercises refer to data and graphs that students will find at the web site of the Federal Reserve
Bank of St. Louis (FRED). Many exercises require more elaborate calculations than other problems
and the use of Excel spreadsheets.
You can use these features as the basis for classroom discussion, homework assignments, and
examination questions.
Copyright © 2025 Pearson Education, Inc.
,4 CHAPTER 1 | Economics: Foundations and Models
Teaching Tips
Hubbard/O’Brien Blog
Visit http://hubbardobrieneconomics.com for the following updates for instructors and students:
● Frequently posted podcast recordings with authors Glenn Hubbard and Tony O’Brien, and occasional
guests, discussing key economic topics in the news
● New Apply the Concepts and Solved Problems, with assessment questions
Hubbard/O’Brien on Twitter
Instructors and students can follow the authors on X (formerly Twitter):
https://twitter.com/o_economics
People must make choices as they try to attain their goals. The choices people make represent the trade-
offs made necessary by scarcity. Scarcity is a situation in which unlimited wants exceed the limited
resources available to fulfill those wants. Economics is the study of the choices people make to attain their
goals, given their scarce resources.
Teaching Tips
Students will better understand what scarcity means if given examples of things that are not scarce. Suggest
examples of “free” resources—sand on a beach and fresh air—and ask your students to contribute their own
examples. They will soon realize that the list of free resources is much shorter than the list of scarce
resources.
Three Key Economic Ideas
1.1 Learning Objective: Explain these three key economic ideas: People are rational, people
respond to economic incentives, and optimal decisions are made at the margin.
A market is a group of buyers and sellers of a good or service and the institution or arrangement by which
they come together to trade.
A. People Are Rational
Rational consumers and firms use all available information as they act to achieve their goals. Although not
everyone behaves rationally all the time, the assumption of rational behavior is useful in explaining most
of the choices people make.
B. People Respond to Economic Incentives
Economists emphasize that individuals and firms consistently respond to economic incentives.
C. Optimal Decisions Are Made at the Margin
Economists use the word marginal to mean an extra or additional benefit or cost from making a decision.
The optimal decision is to continue any activity to the point where the marginal benefit equals the marginal
cost. Marginal analysis is analysis that involves comparing marginal benefits and marginal costs.
Copyright © 2025 Pearson Education, Inc.
, CHAPTER 1 | Economics: Foundations and Models 5
Extra Solved Problem 1.1A
A Doctor Makes a Decision at the Margin
A doctor receives complaints from patients that her office isn’t open enough hours. In response, the doctor
asks her office manager to analyze the effect of keeping her office open 9 hours per day rather than 8 hours.
The doctor’s office manager tells her: “Keeping the office open an extra hour is a good idea because the
revenue from your practice will increase by $300,000 per year when the office is open 9 hours per day.”
Do you agree with the office manager’s reasoning? What, if any, additional information would you need to
decide whether the doctor should keep her office open an additional hour per day?
Solving the Problem
Step 1: Review the chapter material. This problem is about making decisions, so you may want to
review the section “Optimal Decisions Are Made at the Margin” in the textbook.
Step 2: Explain whether you agree with the office manager’s reasoning. We have seen that any
activity should be continued to the point where the marginal benefit is equal to the marginal
cost, MB = MC. In this case, the doctor should keep her office open up to the point where the
additional revenue she receives from seeing more patients is equal to the marginal cost of
keeping her office open an additional hour. The office manager has provided information on
marginal revenue but not on marginal cost. The office manager has not provided enough
information to make a decision, so you should not agree with the office manager’s reasoning.
Step 3: Explain what additional information you need. To make a correct decision, you would need
information on the marginal cost of remaining open an extra hour per day. The marginal cost
would include the additional salary to be paid to the office staff, any additional medical supplies
that would be used, as well as any additional electricity or other utilities. The doctor would also
need to take into account the nonmonetary cost of spending another hour working rather than
spending time with her family and friends or in other leisure activities. The marginal revenue
would depend on how many more patients the doctor can see in the extra hour. The doctor
should keep her office open an additional hour if the marginal revenue of doing so is greater
than the marginal cost. If the marginal cost is greater than the marginal revenue, then the doctor
should continue to keep her office open for 8 hours.
Extra Analyze
the Concept Does Health Insurance Give People an Incentive to Become
Obese?
Obesity is a factor in a variety of diseases, including heart disease, stroke, diabetes, and hypertension,
making it a significant health problem in the United States. Body mass index (BMI) is a measurement of a
person’s weight relative to the person’s height. According to the U.S. Centers for Disease Control and
Prevention (CDC), an adult with a BMI of 30 or greater is considered obese. For example, a 5'6" adult with
a BMI of 30 is 40 pounds overweight.
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,6 CHAPTER 1 | Economics: Foundations and Models
The following two maps show the dramatic increase in obesity between 1994 and 2015. In 1994, in a
majority of states only between 10 percent and 14 percent of the adult population was obese, and in no state
was more than 20 percent of the adult population obese.
By 2015, in every state, at least 20 percent of the adult population was obese, and in 44 states, at least 25
percent of the adult population was obese. Many people who suffer from obesity have underlying medical
conditions. For these people, obesity is a medical problem that they cannot control. The fact that obesity
has increased, though, indicates that for some people, obesity is the result of diet and lifestyle choices.
Potential explanations for the increase in obesity include greater intake of high-calorie fast foods,
insufficient exercise, and a decline in the physical activity associated with many jobs. The CDC
recommends that teenagers get a minimum of 60 minutes of aerobic exercise per day, a standard that only
15 percent of high school students meet. In 1960, 50 percent of jobs in the United States required at least
moderate physical activity. Today, only 20 percent of jobs do. As a result, a typical worker today who may
work at a computer is burning off about 130 fewer calories per workday than a worker in the 1960s who
was more likely to have worked in a manufacturing plant.
In addition to eating too much and not exercising enough, could having health insurance be a cause of
obesity? Obese people tend to suffer more medical problems and so incur higher medical costs. Obese
people with health insurance that will reimburse them for only part of their medical bills, or who have no
health insurance, must pay some or all of these higher medical bills themselves. People with health
insurance that covers most of their medical bills will not suffer as large a monetary cost from being obese.
In other words, by reducing some of the costs of obesity, health insurance may give people an economic
incentive to gain weight.
At first glance, this argument may seem implausible. Some people suffer from medical conditions that can
make physical activity difficult or that can cause weight gain even with moderate eating, so these people
may become obese, regardless of which type of health insurance they have. The people who are obese
because of poor eating habits or lack of exercise probably don’t consider health insurance when deciding
whether to have a slice of chocolate cake or to watch Netflix instead of going to the gym. But if economists
are correct about the importance of economic incentives, then we would expect that if we hold all other
personal characteristics—such as age, gender, and income—constant, people with health insurance will be
more likely to be overweight than people without health insurance.
Jay Bhattacharya and Kate Bundorf of Stanford University, Noemi Pace of the University of Venice, and
Neeraj Sood of the University of Southern California, have analyzed the effects of health insurance on
weight. Using a sample that followed nearly 80,000 people from 1989 to 2004, they found that after
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, CHAPTER 1 | Economics: Foundations and Models 7
controlling for factors including age, gender, income, education, and race, people with health insurance
were significantly more likely to be overweight than people without health insurance. Having private health
insurance increased BMI by 1.3 points. Having public health insurance, such as Medicaid, which is a
program under which the government provides health care to low-income people, increased BMI by 2.3
points. These findings do not mean that health insurance is the sole cause, or even the most important cause,
of obesity. The findings do suggest that people respond to economic incentives even when making decisions
about what they eat and how much they exercise. In Section 1.3, we will see that economists modify
conclusions as they collect additional data.
Note: The exact formula for the body mass index is BMI = (Weight in pounds/Height in inches2) x 703.
Sources: Centers for Disease Control and Prevention, “Prevalence of Self-Reported Obesity among U.S. Adults,” www.cdc. gov;
Katherine M. Flegal, Margaret D. Carroll, Cynthia L. Ogden, and Lester R. Curtin, “Prevalence and Trends in Obesity among U.S.
Adults, 1999–2008,” Journal of the American Medical Association, Vol. 303, No. 3, January 20, 2010, pp. 235–241; Jay
Bhattacharya, Kate Bundorf, Noemi Pace, and Neeraj Sood, “Does Health Insurance Make You Fat?” in Michael Grossman and
Naci H. Mocan, eds., Economic Aspects of Obesity, Chicago: University of Chicago Press, 2011; and Tara Parker-Pope, “Less
Active at Work, Americans Have Packed on Pounds,” New York Times, May 25, 2011.
Teaching Tips
Instructors do not need to spend a lot of class time explaining the material in Section 1.1; subsequent
chapters will reinforce students’ understanding of markets and the three key economic ideas.
The Economic Problem That Every Society Must Solve
Learning Objective: Discuss how an economy answers these questions: What goods and
1.2 services will be produced? How will the goods and services be produced? Who will receive
the goods and services produced?
Every society faces the economic problem that it has only a limited amount of economic resources, so it
can produce only a limited amount of goods and services. Every society faces trade-offs. A trade-off is the
idea that, because of scarcity, producing more of one good or service means producing less of another good
or service. Every activity has an opportunity cost: The highest-valued alternative that must be given up to
engage in an activity. Trade-offs force society to answer three fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
A. What Goods and Services Will Be Produced?
The answer to this question is determined by the choices consumers, managers of firms, and government
policymakers make. Each choice made has an opportunity cost.
B. How Will the Goods and Services Be Produced?
Firms choose how to produce the goods and services they sell. For example, firms often face trade-offs
between using more workers or more machines.
C. Who Will Receive the Goods and Services Produced?
In the United States, who receives the goods and services produced depends largely on how income is
distributed. An important policy question is whether the government should intervene to make the
distribution of income more equal.
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, 8 CHAPTER 1 | Economics: Foundations and Models
D. Centrally Planned Economies versus Market Economies
Societies organize their economies in two main ways. A centrally planned economy is an economy in
which the government decides how economic resources will be allocated. A market economy is an
economy in which the decisions of households and firms interacting in markets determine the allocation of
economic resources. Today, only North Korea has a completely centrally planned economy. In a market
economy, the income of an individual is determined by the payments he or she receives for what he or she
sells. Generally, the more extensive the training your receive and the longer the hours you work, the higher
your income will be.
E. The Modern “Mixed” Economy
The high rates of unemployment and business bankruptcies during the Great Depression of the 1930s caused
a dramatic increase in government intervention in the economy of the United States and other market
economies. Some government intervention is designed to raise the incomes of the elderly, the sick, and
people with limited skills. In recent years, government intervention has expanded to meet goals such as
protection of the environment, promotion of civil rights, and increased access to medical care.
Some economists argue that the extent of government intervention makes it more accurate to refer to the
economies of the United States, Canada, Japan and Western Europe as mixed economies rather than pure
market economies. A mixed economy is an economy in which most economic decisions result from the
interaction of buyers and sellers in markets but in which the government plays a significant role in the
allocation of resources.
F. Efficiency and Equity
Market economies tend to be more efficient than centrally planned economies. There are two types of
efficiency. Productive efficiency is a state of the economy in which every good or service is produced at
the lowest possible cost. Allocative efficiency is a state of the economy in which production is in
accordance with consumer preferences; in particular, every good or service is produced up to the point
where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Voluntary exchange is a situation that occurs in markets when both the buyer and the seller of a product
are made better off by the transaction.
Inefficiency arises from various sources. Sometimes governments reduce efficiency by interfering with
voluntary exchange in markets. The production of some goods damages the environment when firms ignore
the costs of environmental damage. In this case, government intervention can increase efficiency.
Society may not find an efficient economic outcome to be desirable. Many people prefer economic
outcomes they consider fair or equitable⸻even if these outcomes are less efficient. Equity is the fair
distribution of economic benefits. There is often a trade-off between efficiency and equity.
Teaching Tips
Ask students for examples of government regulation of private markets in the United States. Responses
may include: (1) restrictions on the number of diners allowed in a restaurant during a pandemic; (2) making
the sale of addictive drugs such as cocaine and heroin illegal; (3) minimum age requirements for the
purchase of alcoholic beverages and cigarettes; and (4) the prohibition of the sale of new drugs before their
effectiveness is demonstrated through government supervised tests. Ask students whether one of these
examples of government regulation promotes equity or fairness. The difficulty in defining equity will be
apparent.
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