Chapter 1 questions Flashcards
An implication of scarcity is that:
a. people will never be happy.
b. making trade-offs becomes unnecessary as wealth increases.
c. some people will always be poor.
d. people must make trade-offs.
d. people must make trade-offs.
Identify which of the following scenarios illustrate the Scarcity Principle.
a. A middle-class family trying to decide if they can go to Florida on vacation this year.
b. New parents trying to decide if one of them should quit their job to stay at home
c. A single mother considering a second job to pay for her children’s education.
d. Members of Congress negotiating next year’s budget
All of the above
explanation:
Each decision-maker is facing some kind of trade-off in his or her decision, based on the fact that the resources available are limited even though their wants and needs are not. In all four scenarios, more of one thing means less of something else.
The Cost-Benefit Principle indicates that an action should be taken if
a. its total benefits exceed its total costs.
b. its average benefits exceed its average costs.
c. its net benefit (benefit minus cost) is zero.
d. its extra benefit is greater than or equal to its extra cost.
d. its extra benefit is greater than or equal to its extra cost.
explanation:
The extra benefits and extra costs from taking an action determine whether that action should be taken.
The marginal benefit of an activity is the
a. same as the total benefits of the activity.
b. total benefit divided by the level of the activity.
c. extra benefit associated with an extra unit of the activity.
d. total benefit associated with an extra unit of the activity.
c. extra benefit associated with an extra unit of the activity.
Suppose the total benefit of watching 1 baseball game is 100, the total benefit of watching 2 games is 140, and the total benefit of watching 3 games is 150. In this case, the marginal benefit of watching the 1st game is
a. 40.
b. 100.
c. 0.
d. 50
b. 100
explanation:
Marginal benefit is the increase in total benefit that results from carrying out one additional unit of an activity. By watching the 1st game, the marginal benefit is 100.
The implicit cost of an activity is the value of
a. an alternative forgone.
b. the next-best alternative forgone.
c. the least-best alternative forgone.
d. the difference between the chosen activity and the next-best alternative forgone.
b. the next-best alternative forgone.
Jody has purchased a nonrefundable $75 ticket to attend a Miley Cyrus concert on Friday night. Subsequently, she is asked to go to out dinner at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going out to dinner, the opportunity cost of going out to dinner should include
a. only the entertainment value of the concert.
b. the cost of the ticket plus the entertainment value of the concert.
c. only the cost of concert ticket.
d. neither the cost of the ticket nor the entertainment value of the concert
a. only the entertainment value of the concert.
The price of the nonrefundable ticket is a sunk cost, so the only thing that Jody should include in calculating the opportunity cost of going out to dinner, is the entertainment value of the concert.
You paid $35 for a ticket (which is nonrefundable) to see SPAM, a local rock band, in concert on Saturday. Assume that $35 is the most you would have been willing to pay for a ticket. Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert. You would have to work 4 hours, and she would pay you $11/hr. What is the marginal cost of going to the concert?
a. $0
b. $79
c. $35
d. $44
d. $44
The implicit cost of going to the concert is the forgone value of working, which is $44 (4 x $11). Note that we do not factor in the cost of the ticket since it’s a sunk cost, so the extra or marginal cost of going to the concert is $44.
Suppose that in the last few seconds you devoted to question 1 on your physics exam you earned 4 extra points, while in the last few seconds you devoted to question 2 you earned 10 extra points. You earned a total of 48 and 12 points, respectively, on the two questions, and the total time you spent on each was the same.
If you could take the exam again, how—if at all—should you reallocate your time between these questions?
a. Do it the same way. You get 60 points that way.
b. Spend more time on question 1. You get more points from question 1 than you do on question 2.
c. Spend more time on question 2. You’ll get more extra points on question 2 than you’ll lose on question 1.
c. Spend more time on question 2. You’ll get more extra points on question 2 than you’ll lose on question 1.
Even though you earned four times as many points on the first question as you did on the second, the last few seconds you spent on question 2 added more points to your score than did the last few seconds you spent on question 1. This suggests that if you spent a little more time on question 2 and a little less time on question 1, then you’d get more extra points on question 2 than you’d lose on question 1.
Refer to the accompanying table. The average benefit of 5 units of this activity is
Units of Activity Total Cost Total Benefit
0 $ 0 $ 0
1 30 50
2 40 80
3 60 95
4 100 105
5 150 110
6 210 112
a. $22.00.
b. $23.50.
c. $26.25.
d. $18.67.
a. $22.00.
Total benefit is $110, so dividing by 5 gives $22.00.
Refer to the accompanying table. The marginal benefit of the 5th unit of this activity is
Units of Activity Total Cost Total Benefit
0 $ 0 $ 0
1 30 50
2 40 80
3 60 95
4 100 105
5 150 110
6 210 112
a. 5.00.
b. $50.00.
c. $27.50.
d. $45.00.
a. 5.00.
Total benefit increases from $105 to $110 when you go from 4 to 5 units, so the marginal benefit of the 5th unit is $5.00.
Refer to the accompanying table. The marginal benefit of the 5th unit of activity is
Units of Activity Total Cost Total Benefit
0 $ 0 $ 0
1 30 100
2 40 160
3 60 190
4 100 210
5 150 220
6 210 225
a. $50.
b. $44.
c. $10.
d. $5.
c. $10.
The total benefit increases from $210 to $220 when you go from 4 to 5 units, so the marginal benefit of the 5th unit is $10.
Refer to the accompanying table. The average cost of 5 units of activity is
Units of Activity Total Cost Total Benefit
0 $ 0 $ 0
1 2 12
2 6 22
3 12 30
4 20 36
5 30 40
6 42 42
7 56 43
a. $4.
b. $6.
c. $8.
d. $10.
b. $6.
Average cost is the total cost divided by the number of units. Here $30/5 = $6.
Refer to the accompanying table. According to the Cost-Benefit Principle, how many units of this activity should be carried out?
Units of Activity Total Cost Total Benefit
0 $ 0 $ 0
1 30 90
2 40 150
3 60 180
4 100 200
5 150 210
6 210 215
a. 3 units
b. 1 unit
c. 2 units
d. 6 units
a. 3 units
Three units of the activity provide a net benefit (total benefit − total cost) of $120, which is the highest of all the options given. Also, note that marginal benefit is greater than marginal cost for the first three units, but marginal benefit is less than marginal cost for units 4 through 6.
Once a week, Smith purchases a six-pack of cola and puts it in his refrigerator for his two children. He invariably discovers that all six cans are gone on the first day. Jones also purchases a six-pack of cola once a week for his two children, but unlike Smith, he tells them that each may drink no more than three cans. If the children use cost-benefit analysis each time they decide whether to drink a can of cola,
Explain why the cola lasts much longer at Jones’s house than at Smith’s.
Each Smith child has a higher marginal cost of not drinking a cola.
At Smith’s house, each child knows that the cost of not drinking a can of cola now is that it is likely to end up being drunk by the sibling. Each thus has an incentive to consume the cola as rapidly as possible to prevent the other from encroaching on his/her share. Jones, by contrast, has eliminated that incentive by making sure that neither child can drink more than half the cans. This step permits his children to consume at a slower, more enjoyable pace.
The meal plan at University A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays $2 for each additional pound; if the student eats less, he or she gets a $2 per pound refund. If students are rational, at which university will average food consumption be higher?
a. University A
b. University B
a. University A
At University A, the marginal or extra cost for each additional pound of food is $0, so everybody will keep eating until the extra benefit from eating an extra pound is also equal to $0. At University B, however, the cost of eating an extra pound of food is $2, so people will stop eating when the benefit of eating an extra pound falls to $2. Food consumption will thus be higher at University A.
In general, rational decision making requires one to choose the actions that yield the
a. largest total benefit.
b. smallest total cost.
c. smallest net benefit.
d. largest economic surplus.
d. largest economic surplus.
Suppose Avery is trying to decide what to do this coming Saturday afternoon. She has three possible choices. She can either go to the movies, go to the beach, or stay home and read. The table below shows the value Avery places on each option along with its out-of-pocket cost. Which option should Avery choose?
Activity Value Out-of-Pocket Cost
Movies $18 $14
Beach $20 $9
Reading $12 $0
a. The movies
b. The beach
c. Stay home and read
d. It cannot be determined.
c. Stay home and read
(value minus out-of-pocket cost)= net benefit
highest benefit
Suppose Avery is trying to decide what to do this coming Saturday afternoon. She has three possible choices. She can either go to the movies, go to the beach, or stay home and read. The table below shows the value Avery places on each option along with its out-of-pocket cost. Relative to her next best alternative, how much economic surplus does Avery get when she chooses optimally?
Activity Value Out-of-Pocket Cost
Movies $18 $14
Beach $20 $9
Reading $12 $0
a. $20
b. $12
c. $11
d. $1
d. $1
net benefit- next best alternative net benefit= economic surplus
12-11=1
