econChap1

Question 1

What is the Cost-Benefit Principle in economics?

Answer 1

It states that costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.

Question 2

What is the Opportunity Cost Principle?

Answer 2

The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

Question 3

What is the Marginal Principle?

Answer 3

Decisions about quantities are best made incrementally. You should break “how many” decisions down into a series of smaller, or marginal, decisions.

Question 4

What is the Interdependence Principle?

Answer 4

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change.

Question 5

What is economic surplus?

Answer 5

The difference between the benefits you enjoy and the costs you incur from a decision.

Question 6

What is the Rational Rule?

Answer 6

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

Question 7

What is the Production Possibility Frontier (PPF)?

Answer 7

A curve that maps out the different sets of output that are attainable with your scarce resources, illustrating the trade-offs and opportunity costs when allocating resources.

Question 8

What are sunk costs?

Answer 8

Costs that have already been incurred and cannot be reversed. Good decision makers ignore sunk costs.

Question 9

What is the opportunity cost of buying a car, according to Nerida’s example?

Answer 9

The total cost of owning the car for one year is $6,726, which exceeds the $4,700 benefit of not paying for Uber, resulting in an economic surplus of $2,026 by taking Uber instead.

Question 10

What is the framing effect?

Answer 10

A phenomenon where small differences in how alternatives are described or framed can lead people to make different choices.

Question 11

How does the cost-benefit principle relate to nonfinancial costs?

Answer 11

It requires thinking broadly about all costs and benefits, including nonfinancial aspects like satisfaction or time.

Question 12

How does the opportunity cost principle reflect scarcity?

Answer 12

Because resources are limited, making one choice requires giving up another, highlighting the trade-offs due to scarcity.

Question 13

What is the “or what” trick?

Answer 13

A method to apply the opportunity cost principle by always asking “or what” to compare a choice to its next best alternative.

Question 14

How should entrepreneurs think about opportunity costs?

Answer 14

By considering not just financial costs but also the opportunity costs of time and money invested in their business compared to alternatives.

Question 15

What is the benefit of converting costs and benefits into dollars?

Answer 15

It allows for comparing different aspects of a decision by evaluating willingness to pay, making it easier to apply the cost-benefit principle.

Question 16

What is the economic method’s four-step process?

Answer 16

1. Use the marginal principle to break down decisions.
2. Apply the cost-benefit principle.
3. Use the opportunity cost principle by asking ‘Or what?’.
4. Apply the interdependence principle to consider other factors.

Question 17

What does the Rational Rule help you maximize?

Answer 17

Your economic surplus, which is the difference between the benefits you enjoy and the costs you incur.

Question 18

What happens when marginal benefits exceed marginal costs?

Answer 18

Hiring an additional worker or making an additional choice increases your economic surplus.

Question 19

What should you do when marginal benefits equal marginal costs?

Answer 19

Stop making additional choices, as you have maximized your economic surplus.

Question 20

What is the significance of the Production Possibility Frontier being a straight line in Nerida’s example?

Answer 20

It indicates constant opportunity costs between studying economics and psychology.

Question 21

How do productivity gains affect the Production Possibility Frontier?

Answer 21

They shift the frontier outward, allowing more output with the same resources.

Question 22

What is the main lesson of applying the cost-benefit principle correctly?

Answer 22

To think broadly about the full set of costs and benefits involved in your choices.

Question 23

Why is it important to account for unselfish motivations in the cost-benefit principle?

Answer 23

Because they are significant nonfinancial benefits that should be included in your cost-benefit analysis.

Question 24

What is the relationship between the four core principles of economics?

Answer 24

They provide a systematic framework for analyzing individual decisions and making better choices.

Question 25

How does the opportunity cost principle help in decision making?

Answer 25

It ensures that you consider the best alternative you give up, leading to more informed and effective choices.

Question 26

What is the consequence of ignoring the interdependence principle?

Answer 26

You may miss how changes in other factors affect your best choice, leading to suboptimal decisions.

Question 27

How does the interdependence principle relate to different markets?

Answer 27

Changes in one market can affect decisions and outcomes in another, showing the interconnectedness of economic activities.

Question 28

What is an example of a sunk cost in everyday life?

Answer 28

Paying for a movie ticket and deciding whether to stay if you’re not enjoying the film.

Question 29

Why do people with terminal illnesses sometimes opt for experimental drugs?

Answer 29

Because the opportunity cost of not trying the drug is higher due to the severity of their condition.

Question 30

What is the economic rationale behind fewer stay-at-home moms today?

Answer 30

The rising opportunity cost of staying home as women’s wages and the cost of housing have increased.

Question 31

How can the Marginal Principle be applied to studying for an exam?

Answer 31

By deciding whether to study one more hour based on whether the additional benefit exceeds the additional cost.

Question 32

What is the key to using the cost-benefit principle properly?

Answer 32

To think broadly about all the costs and benefits, including nonfinancial ones.

Question 33

How do framing effects impact decision making?

Answer 33

They can cause people to make inconsistent choices based on how options are presented, rather than on actual costs and benefits.

Question 34

What should you do when faced with a ‘how many’ decision?

Answer 34

Break it down into a series of marginal ‘either/or’ decisions and apply the cost-benefit principle to each.

Question 35

What role does the interdependence principle play in predicting others’ decisions?

Answer 35

It helps you understand that others’ choices affect your best options and vice versa.

Question 36

How does scarcity relate to the opportunity cost principle?

Answer 36

Scarcity forces you to make trade-offs, making opportunity costs an essential consideration in decisions.

Question 37

What is the economic surplus in Nerida’s car vs. Uber decision?

Answer 37

$2,026 by choosing Uber over buying the car.

Question 38

Why should sunk costs be ignored in decision making?

Answer 38

Because they cannot be reversed and do not affect the opportunity costs of current decisions.

Question 39

What does the Production Possibility Frontier illustrate about resource allocation?

Answer 39

It shows the maximum possible output combinations of two goods that can be produced with available resources.

Question 40

How does the Marginal Principle simplify ‘how many’ choices?

Answer 40

By breaking them down into smaller ‘either/or’ decisions about one additional unit at a time.

Question 41

What is the main takeaway from the four core principles of economics?

Answer 41

They provide a foundational framework for analyzing and making informed decisions in various aspects of life.