Chapter 1

Question 1

What is the definition of economics and what kind of situations can be addressed by its theories?

Answer 1

Definition: A social science focused on how scarcity (limited resources) and unlimited human wants force us to make choices or trade-offs.
Ex. How people make decisions, how markets work, etc.

Question 2

The Cost-Benefit principle: We undertake an action as long as the marginal benefit (such as
marginal utility or marginal revenue) is equal to or exceeds the marginal cost

Answer 2

We commit an action as long as the marginal benefit (such as marginal utility or marginal revenue) is ≥ the marginal cost

Question 3

include implicit or opportunity cost in the marginal cost of an action

Answer 3

= the next best alternative use of a resource (time or income)
= considers both the benefit sacrificed & the costs avoided of the next best alternative.

ex., your job pays 11/hr. and buying the calc. Off-campus takes 1 hour.
the time implicit cost = $11

Question 4

exclude any sunk costs

Answer 4

= a cost beyond recovery
= a cost that doesn’t change your decision

ex. a $250 non-refundable/non-transferable concert ticket

Question 5

Marginal cost and benefits must be taken into account rather than totals or averages whenever you are deciding how many (what quantity) of something you should have/do

Answer 5

M.B : extra positive of having one more
M.C : extra negative of having one more

M.B > M.C : keep going, green light
M.B = M.C : the last one, stop after this one, yellow light
M.B < M.C : too much/reduce how much we do, red light

Question 6

Economic Surplus

Answer 6

Difference between benefits & costs
M.B > M.C : keep going, econ surplus > 0
M.B = M.C : the last one, econ surplus = 0
M.B < M.C : too much, econ surplus < 0