Ch. 1 - Fundamentals

Question 1

What is opportunity cost defined as?

Answer 1

Defined as the value of the next best forgone alternative

Question 2

What is rational decision making?

Answer 2

The process of maximizing well being (people typically want to make choices that maximize well being or happiness)

Question 3

What is decreasing marginal benefit?

Answer 3

The negative relationship between the marginal benefit associated with the use of a good/service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit.

Question 4

Give an example of decreasing marginal benefit?

Answer 4

Suppose it’s late at night and you’re studying for an exam the next morning. You’ll experience decreasing benefit with each add’l hour spent studying, because each hour of sleep lost to studying is more important than the previous hour.

Question 5

What is increasing marginal cost?

Answer 5

The positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; the more of a good or service that is produced, in a given period of time, the higher the marginal cost associated with each additional unit.

Question 6

Give an example of increasing marginal cost?

Answer 6

Suppose it’s late a t night and you’re studying for an exam early the next morning. You’ll experience increasing marginal cost for each additional hour you spend studying, because each hour of sleep lost to studying is more important than the previous hour.

Question 7

What is the marginal cost equation?

Answer 7

marginal cost (mc) = changes in total cost (tc)/ change in quantity (q) = change of tc/ change of quantity

Question 8

What is the marginal benefit equation?

Answer 8

marginal benefit = change in total benefit (tb)/change in quantity (q) = change in TB/change in Q

Question 9

____________ ______ of something is equal to the change in the total value divided by the change in quantity

Answer 9

marginal value

Question 10

The quality of an economic model can be measured by what?

Answer 10

How well it reflects reality and whether it gives us insights that can be used in the real world`

Question 11

What is a production possibilities schedule?

Answer 11

A table that shows the possible combinations of two different goods/services that can be produced with fixed resources and technology

Question 12

What is a production possibilities frontier?

Answer 12

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology. The PPF shows the production combinations that are both attainable and efficient

Question 13

What is constant opportunity costs?

Answer 13

A characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

Question 14

What is efficient allocation of resources?

Answer 14

Allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another

Question 15

What is inefficient allocation of resources?

Answer 15

Allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another

Question 16

With increased activity marginal benefit begins to …?

Answer 16

fall

Question 17

With increased activity marginal cost begins to ..?

Answer 17

rise

Question 18

The more of a good or service produced…?

Answer 18

the higher the marginal cost

Question 19

Most productive resources are used first illustrates what law?

Answer 19

The law of increasing opportunity costs

Question 20

What is comparative advantage?

Answer 20

The ability to produce a good or service at a lower relative opportunity cost than that of another producer

Question 21

In what instance would there not be a comparative advantage?

Answer 21

When opportunity costs are the same for both producers

Question 22

What is specialization?

Answer 22

The practice of producing a single good or service rather than producing multiple goods or services

Question 23

Specialization is based on what?

Answer 23

Based on comparative advantage (lower opportunity cost), not necessarily on whether you can produce more than someone else.

Question 24

What is marginal cost?

Answer 24

change in total cost that results from producing one more unit of output

Question 25

What is a circular flow model?

Answer 25

It shows how households and firms interact in two key markets, the resource market and the product market.

Question 26

Explain the circular flow model

Answer 26

Households offer for sale the land, labor, capital and entrepreneurial ability to the resource market. Firms purchase these resources with money payments to households. Firms then offer the goods/services they’ve created to the product market. Using their income from selling land, labor, etc, households can purchase goods and services, which are revenue to the firms.

Question 27

Circular Flow example: Dave makes his weekly trop to the grocery store for food

Answer 27

Dave is participating in the product market, buying goods with his money. The grocery store is receiving money in the transaction, and in exchange providing food to Dave. The payment Dave makes is a consumption expenditure. , and the money the store receives is revenue.

Question 28

What is comparative advantage?

Answer 28

Producing a good or service at a low opportunity cost gives the producer an advantage in the market because that producer will be able to sell at a lower price than other producers