Chapter 01 The Core Principles of Economics

Nerida Kyle is thinking of buying a car to avoid taking Lyft to work. She is using the cost-benefit principle to evaluate this decision and is calculating the costs and benefits to owning the car over the next year. She's gathered the following information to help her make her decision - The car costs $15,000 to purchase, but she can resell it after a year of use for $13,500. - She thinks gas will cost her about $1,200 for the year. - The annual insurance premium for her car is $800. - Maintenance and repairs will cost about $300 for the year. - Using Lyft to get to work would cost her $4,000 for the year

The cost of the car for a year is 3,800

How is the economic surplus generated by a decision calculated? a. It is the total benefits minus total costs arising from the decision. b. It is the total benefits plus total costs arising from the decision. c. It is the sum of benefits arising from the decision. d. It is the sum of costs arising from the decision.

a

According to the cost-benefit principle, framing effects or how a choice is described, should a. affect a decision. b. not affect a decision. c. be considered costs. d. be considered benefits

b

Amanda Mendez goes to a local café and orders a sandwich. Her willingness to pay for that sandwich is $10. The price of the sandwich is $4. The cost to the cafe to produce that sandwich is $1. How much economic surplus does Amanda receive when she purchases the sandwich? a. $10 b. $6 c. $4 d. $3

b

Jonathan Mendez is deciding whether to study for his economics exam at a café down the street or go to a concert a few cities over. The time spent commuting to the concert is ____ in his opportunity cost calculations and represents a _____ cost a. included; financial b. included; nonfinancial c. not included; financial d. not included; sunk

b

Juan McDonald is willing to pay $800 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $700. It costs Apple $400 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. a. will; neither Juan nor Apple b. will; both Juan and Apple c. will not; only Juan d. will not; only Apple

b

The cost benefit principle states that a descion should only be pursued if

benefits are greater than the costs

a key to using the cost benefit principle is to think about ____ aspects of a descion

both financial and nonfinancial

the cost benefit principle evaluates _____ costs and benefits , and willingness to pay considerations evalutate _____ costs and benefits.

both monetary and nonmonetary; only nonmonetary

The cost-benefit principle states that _____ are the incentives that shape decisions.

costs and benefits

The cost-benefit principle states that the full set of _____ should be evaluated when making any choices

costs and benefits

Gary Parker is willing to pay $700 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $600. It costs Apple $400 to produce this iPad. How much economic surplus does Gary receive if he purchases this iPad? a. $700 b. $600 c. $200 d. $100

d

It is a beautiful afternoon, and you are considering taking a leisurely stroll through the park. Your alternatives to walking are streaming a movie that you value at $5, taking a nap that you value at $7, or reading a new book that you value at $12. What is the opportunity cost to you of taking the stroll through the park? a. $0 b. $5 c. $7 d. $12

d

Nerida Kyle could either commute to work via Uber or purchase a new car. The average cost of her one-way Uber trip is $15. Nerida works five days a week for 50 weeks a year. Based solely on avoiding the cost of an Uber, Nerida should purchase a car if the cost of the car is _____ than _____ per week

less: $150

Nerida Kyle can either commute to work using a bus or purchase a new car. The bus fare each way is $2. Nerida works five days a week for 50 weeks a year. Based solely on the benefit of avoiding the cost of her bus tickets, Nerida should purchase a car if the cost of the car is _____ than _____ per week

less: $20

Estimating willingness to pay quantifies _____ costs or benefits associated with a choice

nonfinancial

____ is estimated by asking: "What is the _____ I am willing to pay to get this benefit (or avoid that cost)?

willingnes to pay: most

Economists convert costs and benefits into money equivalents by evaluating an individual's

willingness to pay

Decisions should reflect the _____ costs, rather than just the _____ costs. a. financial; marginal b. opportunity; nonfinancial c. opportunity; financial d. nonfinancial; financial

c

Gary Parker is willing to pay $700 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $600. It costs Apple $400 to produce this iPad. How much economic surplus does Apple receive if Gary purchases this iPad? a. $700 b. $600 c. $200 d. $100

c

Nerida Kyle is thinking of buying a new car to avoid taking the bus to work. Each of the following is a cost she should consider when using the cost-benefit principle to evaluate this decision EXCEPT

bus fare

Amanda Mendez goes to a local cafe and orders a sandwich. Her willingness to pay for that sandwich is $10. The price of the sandwich is $4. The cost to the cafe to produce that sandwich is $1. How much economic surplus does the café receive when Amanda purchases the sandwich? a. $6 b. $4 c. $3 d. $1

c

It is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8, but due to the weather the surcharge is triple the regular cost. You should _____ because the benefit to you of taking the Uber is _____ than the cost. a. walk; less b. walk; more c. take an Uber; less d. take an Uber; more

a

Ivan has inherited his grandmother's 1963 Chevrolet Corvette, which he values at $50,000. He decides that he might be willing to sell it, so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000 for such a car. A voluntary economic exchange _____ between Ivan and Samantha because _____ positive economic surplus from the transaction. a. occurs; both Ivan and Samantha receive b. occurs; only Samantha receives c. does not occur; only Ivan receives d. does not occur; neither Ivan nor Samantha receives

a

Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of dinner at the fancy restaurant on the way to the concert is ____ in the calculation of his opportunity cost and represents a _____ cost. a. included; financial b. included; nonfinancial c. not included; financial d. not included; sunk

a

Sunk costs are costs that are incurred a. regardless of which decision is made. b. if a particular decision is made. c. if a particular decision is not made. d. only for some decisions

a

The cost-benefit principle will lead you to make unselfish decisions if you a. account for unselfish motivations. b. maximize monetary costs and benefits. c. pursue only decisions for which the benefits outweigh the costs. d. maximize economic surplus.

a

The opportunity cost principle states that the true cost of something is the a. next best alternative you have to give up to get it. b. least desired alternative you have to give up to get it. c. economic surplus you give up to get it. d. economic surplus you receive from getting it

a

The opportunity costs of attending college include the: a. potential income that could be earned working. b. cost of room and board. c. cost of clothes to wear at school. d. effort and hard work.

a

The opportunity costs of attending college includes the a. cost of tuition. b. cost of room and board. c. cost of clothes to wear at school. d. time spent studying

a

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost. a. go; greater b. go; less c. not go; greater d. not go; less

a

Economists use money equivalents to compare costs and benefits because money is

a common measuring stick

Juan McDonald is willing to pay $900 for a new iPad. He offers to pay $800 for an iPad at the Apple store. It costs Apple $700 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. a. will; neither Juan nor Apple b. will; both Juan and Apple c. will not; only Juan d. will not; only Apple

b

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte? a. $6 b. $4 c. $2 d. $1

b

Sunk costs should ____ be considered as part of the opportunity costs of a decision. a. always b. never c. sometimes d. rarely

b

Which principle tells you that the true cost of something is the next best alternative you have to give up to get it? a. The cost-benefit principle. b. The opportunity cost principle. c. The marginal principle. d. The interdependence principle.

b

Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of tuition for his economics course is _____ in his opportunity cost calculations for this decision and represents a _____ cost. a. included; financial b. included; nonfinancial c. not included; financial d. not included; sunk

c

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction. a. only the buyer b. only the seller c. both the buyer and the seller d. neither the buyer nor the seller

c

Ivan has inherited his grandmother's 1963 Chevrolet Corvette, which he values at $60,000. Samantha is interested in buying such a car and is willing to pay up to $55,000. Ivan hears Samantha is looking for this particular car and offers to sell it to her for $70,000. A voluntary economic exchange _____ between Ivan and Samantha because _____ positive economic surplus from the transaction. a. occurs; both Ivan and Samantha receive b. occurs; only Samantha receives c. does not occur; only Ivan receives d. does not occur; neither Ivan nor Samantha receives

c

Ivan has inherited his grandmother's 1963 Chevrolet Corvette, which he values at $60,000. Samantha is interested in buying the car and offers Ivan $55,000 for the car. Samantha is willing to pay up to $60,000 for such a car. A voluntary economic exchange _____ between Ivan and Samantha because _____ positive economic surplus from the transaction. a. occurs; both Ivan and Samantha receive b. occurs; only Ivan receives c. does not occur; only Samantha receives d. does not occur; neither Ivan nor Samantha receives

c

Juan McDonald is willing to pay $650 for a new iPad. He offers to pay $600 for an iPad at the Apple store. It costs Apple $700 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. a. will; neither Juan nor Apple b. will; both Juan and Apple c. will not; only Juan d. will not; only Apple

c

Sunk costs are costs that a. are potential costs associated with a particular decision. b. are part of the opportunity costs of a decision. c. are incurred in the past and cannot be reversed. d. should be considered in any decision

c

The opportunity costs of a decision may include each of the following types of costs EXCEPT a. out-of-pocket financial costs. b. forgone financial costs. c. sunk costs. d. nonfinancial costs.

c

_____ is a measure of how much your decision has _____ your well-being a. Willingness to pay; improved b. Willingness to pay; reduced c. Economic surplus; increased d. Economic surplus; decreased

c

Juan McDonald is willing to pay $600 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $700. It costs Apple $400 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. a. will; neither Juan nor Apple b. will; both Juan and Apple c. will not; only Juan d. will not; only Apple

d

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does the coffee shop receive when Kevin purchases the latte? a. $6 b. $4 c. $2 d. $1

d

Opportunity cost arises from the fundamental economic problem of a. interdependence. b. marginal costs. c. unlimited resources. d. scarcity

d

You are thinking of going out to dinner at a restaurant with your friends. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $20. You value the restaurant meal at $20, and the time spent with your friends at $30. If you did not go out to the restaurant, you would eat at home using groceries that cost you $10. You should ____ to dinner with your friends because the benefit of doing so is _____ than the cost. a. go; greater b. go; less c. not go; greater d. not go; less

d

t is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8, but because of the weather the surcharge is twice the regular cost. You should _____ because the benefit to you of taking the Uber is _____ than the cost. a. walk; less b. walk; more c. take an Uber; less d. take an Uber; more

d