chapter 1 terms

Question 1

what is a rational person?

Answer 1

A person with well defined goals and tries to fulfill those goals as best as they can.

Question 2

economic surplus

Answer 2

equals the benefit - the cost

Question 3

opportunity cost

Answer 3

value of what must be foregone in order to undertake an activity (implicit and explicit cost)

Question 4

What is Economics?

Answer 4

study of how people make choices under conditions of scarcity and of results of those choices for society.

Question 5

No-Free-Lunch Principle is an example of what principle?

Answer 5

Scarcity principle

Question 6

What is the scarcity principle?

Answer 6

We have boundless needs and wants, the resources available to us are limited. So having more of one good means having less of another.

Question 7

The cost-Benefit Principle?

Answer 7

An individual, firm or society should take an action if and only if the extra benefits from taking the action are at least as great as the extra costs.

Question 8

What does it mean to be rational?

Answer 8

Have well defined goals and try to fulfill them as best as they can

Question 9

What is economic surplus?

Answer 9

The difference between the benefit of an action and its cost.

Question 10

What is your goal as an economic decision maker?

Answer 10

To choose the actions that generate the largest possible economic surplus.

Question 11

What is an opportunity cost?

Answer 11

Value of what you must sacrifice in making a decision; opportunity cost is only the top alternative not all the alternatives together since you can only have done one of those things anyways.

Question 12

All costs include what?

Answer 12

Both implicit and explicit cost.

Question 13

Some economist use opportunity cost to refer to what?

Answer 13

implicit value

• Thus would include $20 to give up babysitting gig you would have done for free
• Does not include the $10 for the movie ticket you would have to buy (explicit cost)

Question 14

Opportunity cost is the value of what?

Answer 14

Best alternative

Question 15

What are the three important decision pitfalls which cause individuals to apply the cost-Benefit principle inconsistently?

Answer 15

1) Measuring Cost and Benefits as proportions rather than absolute dollar amounts
2) Ignoring Implicit cost
3) Failure to think at the margin

Question 16

Why is measuring cost and benefits as proportions rather than absolute dollar amount a pitfall

Answer 16

A benefit of an action is how much you save (benefit) not the proportion you save (benefit)

Many people would say they would walk downtown to but a game that would save them $10 because it would be 40% off but would not for a laptop because it would be only $10 out of 2,020 even though both benefits are equal. This pitfall thinking.

Question 17

Why is ignoring implicit cost a pitfall?

Answer 17

Many people make bad decisions because they tend to ignore the value of forgone opportunities such as time.

-To avoid this you can translate question into “Should I walk downtown or watch the end of this movie?”

Question 18

Why is failure to think at the margin a pitfall?

Answer 18

Sometimes people are influenced by costs they ought to ignore such as sunk cost. Cost that would have occurred no matter there choice. Economist should refer to the cost of a unit or benefit of a unit as marginal cost or marginal benefit.

Only cost that should influence a decision about whether to take an action are those we can avoid by not taking the action. The only benefits we should consider are those that would not occur unless the action were taken.

Question 19

What are sunk cost?

Answer 19

Cost that are beyond recovery at the moment a decision is made.

Question 20

Money spent on a nontransferable, nonrefundable airline ticket is what?

Answer 20

a sunk cost

Question 21

At an all you can eat restaurant that cost $10 is an example of what?

Answer 21

A sunk cost; After they paid they have no way of recovering it thus should not influence decision on how much they eat.

Question 22

You should continue to increase the level of activity as long as what?

Answer 22

The marginal benefit exceeds its marginal cost.

Question 23

The normative economic principle is an example of what?

Answer 23

Cost-benefit principle?

Question 24

Normative economic principle provides guidance on what?

Answer 24

How we SHOULD behave

Question 25

What is a positive/descriptive economic principle?

Answer 25

Describes HOW WE ACTUALLY behave.

Question 26

What is an incentive principle?

Answer 26

A person (or a firm or a society) is more likely to take an action if it benefit rises and less likely to take it is its costs rises; Incentives matter.

Question 27

Microeconomics

Answer 27

The study of individual choice under scarcity and implications for the behavior prices and quantities in individual markets

Question 28

Macroeconomics

Answer 28

The study of the performance of national economics and the policies that governments use to try to improve that performance.

Question 29

What is an economic naturalist?

Answer 29

Someone who uses insights from economics to help make sense of observations from everyday life.