principles 1 -4

Question 1

what do the first 4 principles deal with

Answer 1

how people make decisions

Question 2

what are the 4 principles that deal with how people make decisions

Answer 2

1. people face tradeoffs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentives

Question 3

when governement policies are designed what 2 goals often conflict

Answer 3

policy aimed at achieving more equal distribution of the pie
(welfare, EI)
- doing so will reduce efficiency (people in turn work less, producing less), pie gets smaller

Question 4

what is principle one

Answer 4

people face tradeoffs

- have to give up one thing to get another

Question 5

What is principle two

Answer 5

• cost of something is what you give up to get it

(time,wages, opportunity cost) whatever must be given up to obtain an item

Question 6

what is principle 3

Answer 6

rational people think at the margin
- rational people systemically and purposely do their best to achieve their objectives, given the opportunities they have

Question 7

what sort of things do rational people in firms decide

Answer 7

how many employees to hire

- ow much product to sell to maximize profit

Question 8

what sort of things do rational people do

Answer 8

how much time to spend working, studying, family

Question 9

what does marginal mean

Answer 9

edge

Question 10

what are marginal chagnes

Answer 10

adjustments around the edges of what you are doing

- rational people often make decisons by comparing marginal benefits and marginal costs

Question 11

a person’s willingness to pay for a good is based on what

Answer 11

marginal benefit that an extra unit of good will yield

Question 12

what does marginal benefit depend on

Answer 12

how many units a person already has

- water is plentiful, diamonds are rate

Question 13

when does a rational person take cation

Answer 13

if and only if the marginal benefit of the action exceeds the marginal act

Question 14

what is principle 4

Answer 14

people respond to incentives

Question 15

what is an incentive

Answer 15

prospect of a punishment or reward

Question 16

rational people make decisions based on what

Answer 16

cost versus benefit (this is a response to incentives)

Question 17

if the price of apples rise what happens

Answer 17

we eat more pears and less apples
- apple orchards hire more employees, harvest more apples because the benefit of selling apples is higher
(cost versus benefit)

Question 18

how does cost versus benefit affect the government when making policies

Answer 18

• cost versus benefit affects people’s behavior
• taxes on gas,
  - bus to work, live closer to work, really high taxes, maybe buy electric car

Question 19

what happens when policy makers fail to consider affect of incetives

Answer 19

they often end up with results they did not intend