Opportunity cost, production possibilities frontier

Question 1

The cost-benefit principle
aka Incentive matter

Answer 1

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

Question 2

Economic surplus –

Answer 2

the total benefits minus total costs flowing from a decision. It measures how much a decision has improved your well-being.

Question 3

Framing effect

Answer 3

when a decision is affected by how a choice is described, or framed.

Question 4

The Opportunity Cost Principle

Answer 4

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 5

Sunk cost

Answer 5

a cost that has been incurred and cannot be reversed. A sunk cost exists whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs.

Question 6

Production possibility frontier

Answer 6

shows the different sets of output that are attainable with your scarce resources.

Question 7

cost-benefit principle

Answer 7

Do it if the benefits are at least as large as the costs.

Question 8

opportunity cost principle

Answer 8

the true cost of something is the best alternative you give up to get it.