chapter 1: introduction

Question 1

3def economics

Answer 1

Economics is the science that deals with the allocation of scarce resources to satisfy unlimited human wants.

Question 2

def microeconomics

Answer 2

Microeconomics studies the economic behavior of individual economic decision
makers.

Question 3

externality problem

Answer 3

when people have no incentive to change to solve the problem or to take the problem into account.

eg. globalwarming

Question 4

def Exogenous variable

Answer 4

Exogenous variable: Variable whose value is taken as given in a model.

Question 5

Endogenous variable:

Answer 5

Endogenous variable: Variable whose value is determined within the model.

Question 6

Constrained optimization

Answer 6

Constrained optimization is an analytical tool for making the best choice, taking into account any possible limitations or restrictions on the choice.

-> The solution to any constrained optimization problem depends on the marginal impact of the decision variables on the objective function.

Question 7

An objective function

Answer 7

An objective function is the relationship that the decision maker seeks to maximize or minimize.

Question 8

Constraints

Answer 8

are the restrictions or limits imposed on a decision maker in a constrained optimization problem.

Question 9

Decision makers are rational:

Answer 9

: Each person tries to choose the best alternative available to him or her.

Question 10

An equilibrium

Answer 10

is a state or condition that will continue indefinitely as long as factors exogenous to the system remain unchanged.

Question 11

The equilibrium principle:

Answer 11

Prices adjust until the quantity demanded equals
the quantity supplied.

Question 12

Comparative statics =

Answer 12

comparing two static equilibria without worrying about how the market moves from one equilibrium to another.

Question 13

cap-and-trade system

Answer 13

• Caps are placed on the total amount of emissions from specific sources.
• Within the cap, companies receive or buy emission allowances, which they
  can trade with one another.
• Reductions in emissions of a given amount are achieved as cheaply as
  possible.

Question 14

economic models

Answer 14

or formal descriptions of
the problems they are addressing. They are simplifications of reality and built
on assumptions

Question 15

Marginal reasoning

Answer 15

eg. The manager of a brewery has to decide how to allocate a budget of 1 million euro between television and radio spots.

• The marginal impact of money spent on TV (radio) advertising is how
  much sales go up for every additional euro spent on TV (radio) advertising.
• The marginal impact of advertising is decreasing. The more you spend on
  TV (radio) advertising, the smaller the additional sales generated from
  additional TV (radio) spots.

The solution to any constrained optimization problem depends on the marginal impact of the decision variables on the objective function.

Question 16

The term marginal in microeconomics

Answer 16

The term marginal in microeconomics tells us how a dependent variable
changes as a result of adding one unit of an independent variable.

Question 17

demand curve reflects …

Answer 17

• The demand curve reflects the willingness to pay for apartments. The
  reservation price is the highest price that a person is willing to pay.

Question 18

equilibrium analysis

Answer 18

1. looks at state or conditions quantity demand supply (graph)
2. The market allocates goods to the people with the greatest willingness to pay.

Question 19

An inferior good

Answer 19

is an economic term that describes a good whose demand drops when people’s incomes rise. These goods fall out of favor as incomes and the economy improve as consumers begin buying more costly substitutes instead