Chapter 3
You are considering renting a city apartment with 1,000 square feet for $1,800 per month. The monthly rent on a larger, 1,500-square-foot city apartment is $2,500. The marginal cost of renting an apartment with 500 additional square feet is _____ square foot per month.
$1.4 (2500 - 1800 = 700) --> (700/500 square ft = 1.4)
You are a professor of economics at a university. You've been offered the position of serving as department head, which comes with an annual salary that is $9,500 higher than your current salary. However, the position will require you to work 200 additional hours per year. Suppose the next best use of your time is spending it with your family, which has value of $40 per hour. What is the difference in the net benefit from becoming the department head? The change in net benefit is _____ (Enter your response as an integer.) To optimize, you _____ become a department head.
$1500; should
You have been invited to play a 4-hour round of golf that has a value to you of $50. The total price to play the round of golf is $25. The net benefit of the round of golf is ____. (Enter your response as an integer.) Now assume that you have a job that pays you $6 per hour. Would you be optimizing to accept the invitation to play golf? To optimize, you should _____ golf.
$25; play
Reagan determined that the net benefit of taking the combination of two lecture courses and an online lecture course was $100. The same three courses online gave her a net benefit of $80, and all three in a lecture-based format gave her a net benefit of $90.
Optimization in levels, since she is comparing the net benefits between alternatives.
Optimization using total values includes
1. translate all costs and benefits into common units, like dollars per month 2. calculate the total net benefit of each alternative 3. pick the alternative with the highest net benefit
Which of the following statements regarding the principle of optimization is true? (Check all that apply.) A. It is the unifying principle that connects various seemingly unrelated decisions. B. It means always choosing the best feasible option. C. It takes into account and evaluates multiple trade-offs. D. It applies only in the case of monetary and financial matters.
A. and C.
There is a proverb "anything worth doing is worth doing well." Do you think an economist would agree with this proverb?
No, because the marginal cost of extra effort may be greater than the marginal benefit
Some people choose to live close to the city center; others choose to live away from the city center and take a longer commute to work every day. Does this mean that those who stay away from the city center are being irrational?
No, because their opportunity cost of commuting must be lower.
Determine if the following statements better describe optimization in levels or optimization in differences. John is attempting to decide on a movie. He determines that the new Batman movie provides him with $5 more of a net benefit than the new Spiderman movie.
Optimization in differences, since he is calculating the change in net benefits between alternatives.
John is attempting to decide on a movie. He determines that the new Batman movie provides him with $5 more of a net benefit than the new Spiderman movie.
Optimization in differences, since he is calculating the change in net benefits between alternatives.
Nikki decided to take the first available parking space as she entered the student lot. She felt that the first available space had a $5 premium compared with all other possible spaces since she did not want to risk being late for her exam.
Optimization in differences, since she is calculating the change in net benefits between alternatives. Your answer is correct.C.
Marcia finds that the net benefit of flying from Chicago to Honolulu on a non-stop United Airlines flight is $400, and the net benefit for the same trip flying on a one-stop American Airlines flight is $200.
Optimization in levels, since she is comparing the net benefits between alternatives.
When optimizing for total value, opportunity cost must be _______ total cost . Assuming _____ benefits, the lowest cost option is the optimal choice.
added to; equal
net benefit
benefit minus cost
Since optimization is used to analyze people's choices and help them improve the outcomes of their choices, its
both normative and positive
In which of the following situations is optimization a good description of behavior? A. John is careless and irresponsible causing him to make a lot of mistakes in his work. B. Rita watches movies late at night. The next day, she wakes up late causing her to be late to her exam. C. Tia is a very fun loving person. She chooses to go on a vacation with friends instead of volunteering at NGO as a vacation is more enjoyable. D. Kat, the MIT business management graduate, starts his first business and incurs huge financial losses despite graduating from MIT.
c
Optimization in differences
calculates the change in net benefits when a person switches from one alternative to another and then uses these marginal comparisons to choose the best alternative
Optimization in levels
calculates the total net benefit of different alternatives and then chooses the best alternative.
Technique 1 optimization
calculates the total value of each feasible option and then picks the option with the greatest total value
Marginal analysis evaluates the _____ in net benefits when you switch from one alternative to another. Marginal analysis calculates the ____ of doing one step more of something.
change; consequences
behavioral economics
explains why people optimize in some situations and fail to optimize in others
Technique 2: Marginal Analysis
focuses on differences among the feasible options and finds the best option by analyzing the differences
Optimization using total value and optimization using marginal analysis give...
identical answers
If opportunity cost were to suddenly increase, total cost would
increase and net benefit would decrease (An increase in opportunity cost increases total cost and reduces net benefit. But this would make a new optimization analysis necessary as all options would change. OK)
When Janet looks at the additional value of purchasing a new laptop to the cost as compared to keeping her old one, she is using optimization based on
marginal analysis
Making an optimal decision involves....
multiple trade-offs
when an economic agent chooses the best feasible option, she is....
optimizing
Economist use optimization to predict most of the choices
people, households, businesses, and the government make
Principle of Optimization at the Margin
states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.
Optimization using marginal analysis calculates...
the change in total value when a person switches from one feasible option to another, and then uses the marginal comparisons to choose the option with the highest total value
Optimization is the process that describes __________.
the choices that peoplepeople make.
Total cost of rent includes ....
the direct cost of rent and indirect cost of commute time
Optimization using total value calculates....
the total value of each feasible option and then picks option with highest total value
Optimization in levels examines ___________, while optimization in differences analyzes ____________.
total net benefits of alternatives; the change in net benefits.
When John determines what choice of walking shoes will give him the best bang for his buck, he is using optimization based on
total value
Whatever choices people face, economists believe that they will
try to choose optimally, but don't assume they always successfully or consistently optimize
Optimization using marginal analysis has three steps:
¥ (1) translate all costs and benefits into common units, like dollars per month; (2) calculate the marginal consequences of moving between alternatives; and (3) apply the Principle of Optimization at the Margin by choosing the best alternative with the property that moving to it makes you better off and moving away from it makes you worse off.
Does the principle of optimization imply that people always make the best choices?
Yes, it is a good approximation for the decisions people make.