Chapter 9: Decision Making by Individuals and Firms

WORK IT OUT////////////////////////////////////////////// Hiro owns and operates a small business that provides economic consulting services. What is Hiro's accounting profit? accounting profit: $

$43,000

Jim is considering leaving work early to go to a baseball game. A ticket costs $30 and it costs $5 to park at the stadium. Jim will miss 3 hours of work, where he is paid $20 an hour. What is Jim's total implicit cost of going to the game?

$60

What is Hiro's economic profit for the year? Economic profit for the year: $

- $ 7,100

As George ate pizza during one recent outing, he found that he enjoyed each additional slice less and less. This implies that his marginal benefit was:

Decreasing

LEARNING CURVE///////////////////////////////////////// True or False: Accounting profit is revenue minus all opportunity costs. This is _____.

False

True or False: Behavioral economics is based on the idea that economic incentives do NOT influence human behavior. This is _____.

False

True or False: In calculating accounting profit, the implicit costs of capital, as well as explicit costs, are subtracted from revenue. This is _____.

False

Which of following statement is true:

Since Hiro's economic profit is negative, he would be better off if he didn't operate the consulting business and taught economics instead.

True or False: Concerns about fairness can explain why people will sometimes give up some potential economic gain. This is _____.

True

True or False: Economic profit is revenue minus all opportunity costs. This is _____

True

Leaving a tip for the waiter or waitress who served one a restaurant meal is a demonstration of:

a concern about fairness.

PRE-CLASS TUTORIAL////////////////////////////////////////// The following would be an example of a variable input in the production of pizza:

d) cheese

The profit-maximizing principle of marginal analysis says that the optimal quantity is the:

largest quantity at which marginal benefit is at least as great as marginal cost.

People are willing to buy insurance because of:

risk aversion.

Jennie is selling doughnuts as a fundraiser for the Humane Society. If the marginal benefit from selling the last box of doughnuts was $5 and the marginal cost of that box was $2, Jennie should:

sell more doughnuts.

If the marginal benefit received from consuming a good is equal to the marginal cost of production:

society's well-being cannot be improved by changing production.

Accounting profit is:

the difference between revenue and explicit costs.

QUIZ Q's/////////////////////////////////////////////////////// You own a small deli that sells sandwiches, salads, and soup. Which factor is an implicit cost of the business?

the job offer you did not accept at a local catering service

If marginal costs of production are greater than marginal benefits of production:

too much of the good is being produced.

Given the information in the table provided, the marginal benefit of the third Egg McMuffin is _____ dollars.

two

Behavioral economics primarily considers:

why people sometimes make less-than-perfect choices.

7.) Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. a.) Use marginal analysis to find Lauren's optimal number of karate classes per week. karate classes That number of classes is optimal for Lauren because b.) Use marginal analysis to find Georgia's optimal number of karate classes per week. karate classes That number of classes is optimal for Georgia because

a.) 1 ; for every other number of classes, the marginal cost exceeds the marginal benefit. b.) 2 ; that is the maximum number of classes for which the marginal benefit exceeds the cost.

A rational decision is one that leads to:

the most preferred outcome for the decision-maker.

Which of the following decisions is LEAST likely to be successfully handled with marginal analysis?

trying to decide who to vote for in the upcoming election

A student who joins a study group to enforce the discipline of regular studying has developed a strategy to deal with:

unrealistic expectations about future behavior.

People who consistently think that they will improve their behavior tomorrow are exhibiting:

unrealistic expectations about future behavior.

Reggie owns and operates a cheese shop in the village of Somerset. ~ What is Reggie's accounting profit? ~ What is Reggie's economic profit?

$ 60,000 - $ 12,000

1.) What is the primary difference between accounting profits and economic profits? 2.) Russ owns a fried chicken stand that operates at the local beach. In calculating how much he earns from his business, Russ notices a difference between his economic and accounting profits. ~ Why would Russ' economic profits differ from his accounting profits?

1.) Accounting profits ignore implicit costs; economic profits consider them. 2.) He may have implicit costs associated with operating the chicken stand in addition to explicit costs.

True or False: Marginal cost always decreases as more units of a good are produced. This is _____.

False

True or False: Marginal cost always increases as more units of a good are produced. This is _____.

False

True or False: The explicit cost of a year of college for a football player who could play in the NFL is the salary that he could earn in the NFL. This is _____.

False

The amount by which an additional unit of an activity increases total benefit is:

Marginal Benefit

Economic models are typically based on the principle that people behave rationally. However, people do not always behave rationally. Which of the statements is NOT a reason why economists still consider their models valid, in spite of the irrationality of people?

The existing models have been in place for so long, they are considered untouchable, the equivalent of an economic law.

Which statement describes a "how much" decision?

Tim is trying to decide the amount of money to save each month to buy a new car next year.

True or False: It is easier to construct economic models based on the assumption of rationality than on the assumption of irrational behavior. This is _____.

True

True or False: Marginal analysis is used in making "how much" decisions. This is _____.

True

6.) You are the manager of a gym, and you have to decide how many customers to admit each hour. a.) Suppose that each customer pays $15.25 for a one‑hour workout. Use the profit‑maximizing principle of marginal analysis to find the optimal number of customers that you should admit per hour. b.) You increase the price of a one‑hour workout to $16.25. What is the optimal number of customers per hour that you should admit now?

a.) 3 b.) 5

An automatic payroll deduction savings plan is one way of addressing the problem of:

having unrealistic expectations about future behavior.

Economic profit is revenue:

minus explicit costs, implicit costs, and depreciation.

Someone who avoids decision-making altogether is demonstrating:

status quo bias.

4.) You have bought a $10 ticket in advance for a college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20... ~ What is the net benefit, or profit, of the soccer game after you hear about the baseball game but have already purchased the nonrefundable soccer game ticket? Soccer ticket: $ ~ What is the net benefit, or profit, of the baseball game? Baseball ticket: $

~ $20 ~ $15

Noah produces hand‑blown light bulbs out of his garage and has a steady customer base. ~ Place Point A on the optimal point of production on the graph. ~ If Noah initially put seven light bulbs in each pack, which of the following would increase his profit?

~ GRAPH: Point A shift to where lines intersect ~ Include fewer lights bulbs in each pack.

(Table: Marginal Cost of Sweatshirts) Use Table: Marginal Cost of Sweatshirts. The marginal cost of the second sweatshirt is:

$ 11

(Table: Marginal Analysis of Sweatshirt Production I) Use Table: Marginal Analysis of Sweatshirt Production I. The profit at the optimal quantity of sweatshirts is:

$ 12

(Table: Marginal Benefit of Sweatshirts) Use Table: Marginal Benefit of Sweatshirts. The marginal benefit of producing the third sweatshirt is:

$ 14

(Scenario: Betty's Cookie Shop) Use Scenario: Betty's Cookie Shop. Betty's implicit and explicit costs are equal to:

$ 204,500

(Table: TC's Pizza Parlor) Use Table: TC's Pizza Parlor. Assume that the marginal benefit is constant in intervals of production. Suppose five slices of pizza are being produced. What is the marginal benefit of producing one more slice of pizza?

$ 3

Jack owns a bicycle shop where he sells and repairs bicycles...

$120,000

Jim is considering leaving work early to go to a baseball game. A ticket costs $30 and it costs $5 to park at the stadium. Jim will miss 3 hours of work, where he is paid $20 an hour. What is Jim's total opportunity cost of going to the game?

$95

Please identify the mistake made in regard to economic decision-making in each scenario. 1.) Alexander is heavily invested in the stock of Nortel, a telecommunications giant...Alexander's mistake is an example of 2.) Jim is washing his laundry and, as he checks his pockets, finds an unexpected windfall of $50...Jim's mistake is an example of 3.) Geneva is a researcher at a biotech firm, and faces decision paralysis every time a big question is posed to her...Geneva's mistake is an example of 4.) Tiffany lives in Alameda, California...Tiffany's mistake is an example of 5.) Steve is trying to diet...Steve's mistake is an example of

1.) Loss Aversion 2.) Mental Accounting 3.) Status Qua Bias 4.) Misperceiving Opportunity Costs 5.) Overconfidence

Match the definitions with the terms that most closely align with the description. 1.) the cost of producing one more unit of a good or service 2.) the situation where an additional unit of a good or service costs the same as each of the former units 3.) the benefit experienced from undertaking one more unit of an activity 4.) a situation where the expense of producing one more unit of a good or service is greater than that of producing the previous unit 5.) the amount that, when produced or consumed, results in the greatest possible net gain 6.) the situation where the gain from an additional unit of a good or service is less than the gain from producing the previous unit

1.) Marginal Cost 2.) Constant Marginal Cost 3.) Marginal Benefit 4.) Increasing Marginal Cost 5.) Optimal Quantity 6.) Decreasing Marginal Cost

(Table: TC's Pizza Parlor) Use Table: TC's Pizza Parlor. What is the optimal level of production?

15 slices

The table shows the benefits and costs per hour of Tom's bicycle delivery service in New York City. The optimal quantity of hours for Tom to work is:

4

The table shows Tom's total cost per hour to deliver documents on his bicycle in New York City. Given the information in the table, the marginal cost of the fifth hour is _____ dollars.

5

Patrick has chosen to double major in finance and microbiology and studies 14 hours a day as a result. ~ What is the optimal quantity of GreenCow drinks for Patrick? ~ What occurs if Patrick consumes more than the optimal quantity?

5 ; The extra energy benefits Patrick gets from another can are no longer worth the cost.

You plan to attend a movie on Saturday night. You buy a ticket for $7 and then lose it. According to marginal analysis, you should:

Buy another ticket and attend the movie

True or False: In the economic analysis of decision making, the optimal quantity is the quantity that minimizes average costs. This is _____.

False

True or False: Mary decides to hike the Appalachian Trail instead of working as a bank teller for the summer. The $200 she spends on hiking boots is an implicit cost. This is _____.

False

True or False: Most economic models assume that people make choices based on achieving the best possible outcome for society as a whole. This is _____.

False

After three years at an expensive college, Pierre realizes that he doesn't want to finish school but really wants to be a chef. When Pierre suggests that he leave college for culinary school, his parents insist that he stay for one more year to get his degree. Which statement is TRUE?

Pierre's parents are wrong: the marginal benefit to Pierre of another year of college is less than the marginal cost of college.

True or False: Mary decides to hike the Appalachian Trail instead of working as a bank teller for the summer.

True

True or False: Mary decides to hike the Appalachian Trail instead of working as a bank teller for the summer. The $300 that she spends to fly home from Maine at the end of the hike is an explicit cost. This is _____.

True

True or False: Opportunity costs include both implicit and explicit costs. This is _____.

True

True or False: The salary that one could earn at a full-time job is an implicit cost of attending college instead of taking a job. This is _____.

True

On your way home from Super Groceries, your car breaks down. Which three items should you save?

Vegetables Eggs Beef

2.) You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

Your economic profit is too low to cover all of your costs.

END OF CHAPTER////////////////////////////////////////// 1.) a.) How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero? $ b.) How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic profit of just zero?

a.) $5,000 b.) $67,000

8.) a.) Calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of increasing the percentage of the population vaccinated from 20% to 30%. In addition, calculate the net increase in human lives. ~ MB: ____ lives saved ~ MC: ____ lives lost ~ Net benefit: ____ lives saved b.) Using marginal analysis, determine the optimal percentage of the population that should be vaccinated. Optimal percentage: ___%

a.) 20 ; 8 ; 12 b.) 50

9.) Patty delivers pizza using her own car, and she is paid according to the number of pizzas that she delivers. a.) Use marginal analysis to determine Patty's optimal number of hours worked. Optimal hours worked: hours b.) Calculate the total profit to Patty from working zero hours, one hour, two hours, and so on. Now, suppose Patty chooses to work for one hour. Compare her total profit from working for one hour with her total profit from working the optimal number of hours. How much would she lose by working for only one hour? Loss from working only one hour: $

a.) 3 hours b.) $21

10.) Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce shoppers to buy more. a.) What is the optimal quantity of diamonds to produce? Optimal output: ____diamonds b.) Calculate the total profit to De Beers from producing each quantity of diamonds. Which quantity gives De Beers the highest total profit? Profit-maximizing output: ____diamonds

a.) 5 diamonds b.) 5 diamonds

3.) Suppose you have just paid a nonrefundable fee of $1,000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. a.) You are offered a part-time job in a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in the cafeteria anyway since you have already paid for those meals. Are your parents right? Explain why or why not. b.) You are offered a part-time job in a different restaurant where, rather than being able to eat for free, you receive only a large discount on your meals. Each meal there will cost you $2. If you eat there each evening this semester, it will add up to $200. Your roommate says that you should eat in the restaurant since it costs less than the $1,000 that you paid for the meal plan. Is your roommate right? Explain why or why not.

a.) No, because the nonrefundable $1,000 should not influence your decision. b.) No, because the $1,000 you paid for the meal plan is a sunk cost.

Please label each scenario as to whether or not the person is acting rationally and making choices leading to the outcome they desire most. a.) Steven's family is at a Korean restaurant...Steven is acting b.) Jacklyn obtains her first credit card...Jacklyn is acting c.) Brian's economics professor assigns online homework that is due at 11:55 p.m...Brian is acting d.) Julie's friend, Homer, offers her a $250 bet on a popular sporting event...Julie is acting

a.) Rationally b.) Irrationally c.) Irrationally d.) Rationally

Identify which principle applies to each scenario and place the appropriate terms in the corresponding spaces. a.) After spending hours researching his choices, Mark decides on a laptop that will cost him $799. As he walks into his local retailer, a salesman presents him a laptop with marginally better features at the same price...Mark's decision is an example of___. b.) Charlotte delivers food for a fried chicken restaurant... The family's decision is an example of___. c.) Cathy is a very good driver... Cathy's decision is an example of___.

a.) bounded rationality. b.) fairness. c.) risk aversion.

The marginal benefit of producing a good or service is the:

additional benefit incurred by producing one more unit of that good or service.

The discipline that combines economic modeling with insights from human psychology is known as:

behavioral economics.

According to the principle of "either-or" decision making, a wise decision-maker will:

choose the activity with the positive economic profit.

A wise decision is made by:

considering both implicit costs and explicit costs.

Given the information in the table, the production of Egg McMuffins shows _____ marginal costs.

constant

Sunk costs are:

costs that have already been incurred and are nonrecoverable.

Assume the following table described the production function for haircuts. From 2 to 3 workers the marginal product of workers:

d) decreases

In the economic analysis of decision making, the optimal quantity is the quantity that:

generates the highest possible total profit.

Behavioral economics was motivated by an attempt to understand:

how people actually choose among economic alternatives.

Suppose Eastland College does not have a summer program and could rent out the campus to various summer sports camps for $100,000. The potential revenue of the summer camps represents a(n):

implicit cost of capital

(Scenario: Betty's Cookie Shop) Use Scenario: Betty's Cookie Shop. Betty is trying to decide at what point she should stop selling cookies, and she knows she cannot change the price of a cookie. She should stop selling cookies if her:

implicit costs are greater than her accounting profits.

Daniel Kahneman won the 2002 Nobel Prize in economics for:

integrating the insights of human psychology into models of economic decision making.

An explicit cost:

is a cost that involves an actual outlay of money.

According to the profit-maximizing principle of marginal analysis, an activity should be continued as long as:

marginal benefit is greater than or equal to marginal cost.

Brenda has insured her car with Good Guys Insurance for 10 years. Based on conversations with friends, she believes that she could get a lower rate with another company. Yet, she stays with Good Guys Insurance because, as she says, "This is the only insurance company I have ever dealt with." Brenda is exhibiting:

status quo bias.

Loss aversion can help to explain why:

sunk costs are hard to ignore.

Cindy just graduated from college and started working at a large accounting firm. Although the firm will match her contributions to a retirement account, Cindy wants to wait several years before participating since there are so many things she needs to buy right now. What type of behavior does this represent?

unrealistic expectations about the future

Albert owns a breakfast diner and decides to add a new item, the Peerless Omelet, to his menu. Albert must decide how many eggs to include in each omelet so that he makes the highest profit. Please use the information in the chart to answer the questions. ~ How many eggs should Albert include in the omelet? ~ What kinds of marginal cost does Albert have?

~ 6 eggs ~ Constant

HOMEWORK Q's////////////////////////////////////////////////////////// Angus works as a dairy farmer and loves his work. However, because the dairy business has not been doing well lately, Angus is considering changing careers. He could work as a technician at the local dairy plant and earn $27,000/year. Angus decides to make a list of the costs of staying in business as a farmer and asks you for help. Please classify each of Angus's costs as explicit or implicit. ~ Explicit costs ~ Implicit costs

~ Explicit costs: The wages he pays to his hired hand The feed he buys for his cows The gas he uses for his farm truck The cost of veterinary care for his cows. ~ Implicit costs: The time is takes him to milk all of his cows The $27,000 annual salary he would receive from working at the dairy plant

Classify each of the scenarios as an "either-or" decision or a "how much" decision. ~ either-or decisions ~ how much decisions

~ either-or decisions: After graduation from law school... Bella is accepted to four graduate school... ~ how much decisions: Jake needs to stay awake while he studies... Marvin arrives at his favorite buffet to eat chinese food...