ECON CH 1

The net benefit of adding the 20th shirt to one's wardrobe is

-$20.

An economic naturalist is described as someone who

applies economic insights to everyday life.

The textbook suggests that applying the basic principles of economics to the details of everyday life will

make one an economic naturalist.

According to the textbook, psychologists have found that if people lose $10 on the way to make a $10 purchase they tend to __________ while if they make the $10 purchase and then lose or break the good they tend to __________.

make the purchase anyway; not make the purchase again

The extra benefit that comes from an extra unit of activity is called the _________of the activity.

marginal benefit.

In applying the cost-benefit principle one should calculate the:

marginal cost and marginal benefit and choose that quantity of an activity where the marginal benefit equals the marginal cost

The extra cost that results from an extra unit of an activity is the

marginal cost.

Economics is conventionally divided into two subjects called:

microeconomics and macroeconomics.

The study of individual choices and group behavior in individual markets defines

microeconomics.

In order for an economic model to be valid,

most people must act as if they explicitly mimic the model.

The economic surplus of a particular action is

the difference between the benefit and the cost of the action.

Choosing the 1,000 Mhz computer would be inefficient because

the extra benefit is less than the extra cost.

Macroeconomics differs from microeconomics in that:

the latter studies individual markets while the former studies groups of markets, including the whole economy.

The opportunity cost of an activity is the value of

the next-best alternative forgone.

Macroeconomics is distinguished by its concentration on

the performance of national economics and ways to improve upon the performance.

Forest is a mountain man living in complete isolation in Montana. He is completely self sufficient through hunting, fishing, and farming. He has not been in the city to buy anything in five years. One can infer

the scarcity principle still applies because more hunting means less fishing and so on.

If a campus organization provides a free lunch to all students who show up, then

the scarcity principle still applies to the decision to allocate the time to go and eat.

If all the world's resources were to magically increase 100 fold, then

the scarcity principle would still govern behavior.

The existence of the cost-benefit principle stems from

the tradeoffs the scarcity principle indicates must be made.

Choosing to study for an exam until the extra benefit (improved score) equals the extra cost (mental fatigue) is

an application of the cost-benefit principle.

Given the information in question 97, in order to maximize her income, Sonya should:

take the cab because the opportunity cost is less than that of riding the bus.

At the very least, Joe Average and Bill Gates are both identically limited by

the 24 hours that comprise a day.

Shelly purchases a leather purse for $400. One can infer that

her reservation price was at least $400.

The best number of shirts to own is

15.

Which of the following questions would not be part of macroeconomics?

Did the sharp increase in gasoline prices alter SUV sales?

Which of the following statements would an economist label a "positive" statement?

It is 72 degrees inside this classroom.

Joe has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $250, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $245. Last week he drove to campus to buy a concert ticket because they offered 20 percent off the regular price of $20.

It would be rational for Joe to drive to campus because the $5 saving is more than he saved by driving there to buy the concert ticket.

Jenna decides to see a movie that costs $7 for the ticket and has an opportunity cost of $20. She says to one of her friends that the movie was not worth it. Apparently, after the movie,

Jenna overestimated the benefits of the movie.

The web site for this textbook can be viewed simultaneously by thousands of students around the world without paying money to view it. Does this suggest that the concept of scarcity does not apply to web sites?

No, because each of the students incurs an opportunity cost measured by the next best alternative to viewing the web site.

Which of the following decisions would not be part of microeconomics?

Should the federal budget always be balanced.

The cost-benefit principle predicts that Juan should do X and not Z but instead Juan chooses to do Z. Which of the following statements is not a reasonable explanation for the difference in the predicted and actual outcome?

The cost-benefit principle is inherently flawed and produces predictions rarely supported by observation.

Suppose a person makes a choice that seems inconsistent with the cost-benefit principle. Which of the following statements represents the most reasonable conclusion to draw?

The person (explicitly or implicitly) over-estimated the benefits or under-estimated the costs or both

The scarcity principle applies to

all decisions.

That individuals make inconsistent choices and the inconsistencies have a strong pattern is, in the view of the textbook,

additional support for the study of economics to identify the inconsistencies and improve decision-making.

Arthur would be willing to pay someone else to wash his car for $15 but not for $20, suggesting that Arthur's

benefit of a clean car is at least $15 but less than $20.

The reservation price of a good or service is a monetary measure of the __________ to the consumer.

benefit of the good

The marginal cost of an activity is the

change in the costs of the activity divided by the change in the level of the activity.

The distinguishing feature of microeconomics is studying

choices made by individuals or groups in the context of individual markets.

Suppose a retail store was offering 10% off all prices on all goods. The incentive to take advantage of the 10% savings is

directly related to the list price of the good.

The concept of scarcity applies equally to Bill Gates and a homeless person because;

there are only 24 hours in the day for both of them.

The use of economic models, like the cost-benefit principle, means economists believe that

this is a reasonable abstraction of how people choose between alternatives.

Whether studying the size of the U.S. economy or the number of children a couple will choose to have, the unifying concept is

wants are unlimited, resources are limited to some but not to others and thus some people must make tradeoffs.

A rational person is one that

possesses well-defined goals and seeks to achieve them.

Assume the minimum that Joe would be willing to accept to drive to the university campus is equal to the amount he saved on the concert ticket (see question 85). What would be the amount of his economic surplus if he bought his textbooks at the university bookstore rather than via the Internet?

$1

The total cost of a 700 Mhz computer is

$1,000.

The total benefit of an 800 Mhz computer is

$1,900.

The Third Wave Computer Company employs Sally to assemble personal computers. Sally can assemble 1 computer if she works 1 hour, 4 computers in 2 hours, 7 computers in 3 hours, 9 computers in 4 hours, and 10 computers in 5 hours. Each computer consists of a motherboard that costs $250, a hard drive costs $150, a case costs $25, a monitor that costs $200, a keyboard at $50 and a mouse costs $25. The cost of employing Sally is $50 per hour. What is the marginal cost of producing the computers Sally assembles during her second hour of work?

$2,150

Salvator bid on a Mark McGuire baseball card that was offered in an auction on an Internet web site. His first bid for $10 was quickly surpassed by another bidder, and he entered a second bid for $20. This was also eventually surpassed, at which time he entered a bid for $50 (the maximum he was willing to bid for the card). When the auction deadline passed, he was notified that his was the highest bid and he would soon be receiving the card. In his excitement, he logged onto a chat board for baseball card collectors and posted a notice that he had just purchased the Mark McGuire card. Soon he received a reply from another collector offering to buy the card for $60, but Salvator politely declined the offered. During the next few days a series of offers were made, all of which he turned down until a collector offered to pay $75 for the card. Salvator decided he could not pass up this offer and accepted it. From this we can conclude that Salvator's economic surplus from purchasing the Mark McGuire card was equal to:

$25.

If your reservation price for a pre-cooked meal is $15 and the opportunity cost of the pre-cooked meal is $12, the economic surplus of having a pre-cooked meal equals:

$3.

The marginal cost of adding the 10th shirt to one's wardrobe is

$30.

Amy is thinking about going to the movies tonight to see Nutty Professor 2. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is

$37.

The marginal cost of upgrading from a 700 to a 800 Mhz computer is

$400.

The net benefit of adding the 10th shirt to one's wardrobe is

$45.

Sophia wants to go to a friend's house this evening, but has promised her mother that she would clean the house during that time. Her brother, James, has offered to clean the house for her if she will pay him $10. Sophia replies, "I'll pay you five dollars (and not a cent more!)." The:

$5 represents Sophia's opportunity cost of cleaning the house this evening.

If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105, then the total costs are

$50, 125, and $230.

The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is

$500.

The marginal benefit of adding the 10th shirt to one's wardrobe is

$75.

If Sally works for 10 hours she can sell 15 insurance contracts, and if she works for 11 hours she can sell 18 insurance contracts. The marginal benefit of the 11th hour of Sally's work equals:

3 insurance contracts.

The Third Wave Computer Company sells each computer for computers $725. Using the information in question 88, how many hours should the Third Wave Computer Company employ Sally to maximize its benefit from her employment?

4 hours

Application of the cost-benefit principle would lead one to purchase a __________ computer because __________.

800 Mhz; the marginal benefits and marginal costs are equal

The Smithville Elementary School Teachers Association petitions the Smithville School Board to provide a computer lab for their school. To support their argument the Association presents data from national studies that show when students are provided with computer training they earn an average of $5,000 of additional income during their lives. In order for the School Board to make a rational choice, it should:

build the computer lab if the additional cost per student is less than or equal to the additional income.

The logical implication of the scarcity principle is that

choices must be made.

The scarcity principle indicates that __________ and the cost-benefit principle indicates __________.

choices must be made; how to make the choices

The number of US households with access to the Internet and those with broadband connections is growing rapidly. As an economic naturalist, one could predict that when a major purchase is being considered, families will

collect more information beforehand because the cost of finding and acquiring it is lower.

Deciding to pursue an activity as long as the extra benefits are at least equal to the extra costs defines the

cost-benefit principle.

The 7th beer that Tim consumes will produce an extra benefit of 10 cents and has an extra cost of zero (Tim is at a frat party). The cost-benefit principle predicts that Tim will

drink the 7th beer and continue until the marginal benefit of drinking another beer is zero.

Suppose Xena's reservation price for a new sword is $1,000 but she is able to purchase one for $900. Her __________ is __________.

economic surplus; $100

The study of choices made in the face of scarce resources is the essence of

economics.

Samantha has estimated that with a college education she will be able to earn an additional $40,000 of income. The cost of attending a state university is $25,000, while a private university costs $40,000 (all estimates are calculated in current dollars). Samantha would make a rational decision if she chooses to attend:

either the state or the private university

When economists say there is no such thing as a free lunch, they mean that:

every choice we make involves a tradeoff.

The principle of scarcity applies to

everyone; consumers, firms, governments, and nations.

The marginal benefit of an activity is the

extra benefit associated with an extra unit of the activity.

The range of topics or issues that fit within the definition of economics is

extremely wide, requiring only the ideas of choice and scarcity.

Economics is best defined as the study of

how people make choices under the conditions of scarcity and the results of the choices.

The cost-benefit principle indicates that an action should be taken

if the extra benefit is greater than or equal to the extra costs.

Tony notes that an electronics store is offering a flat $20 off all prices in the store. Tony reasons that if he wants to buy something with a price of $50 that it is a good offer but if he wants to buy something with a price of $500 it is not a good offer. This is an example of

inconsistent reasoning; saving $20 is saving $20.

Viewing the loss of $10 before a $10 purchase as being different from the loss or destruction of the $10 purchase is

inconsistent with rational behavior because, in either case, one has experienced a $10 reduction on wealth.

In general, rational decision making requires one to choose the actions that yield the

largest economic surplus.

For a given question to be considered an economic question, it would need to involve

limited resources and making a choice.

The study of national economies and policies to improve their performance is known as

macroeconomics.

The reservation price of a particular good or service is the

maximum amount one would be willing to pay for it.

In deciding the number of students to allow to enroll in the economics classes, the Chairperson of the Economics Department is making a(n) __________________ decision.

microeconomic

Sonya is employed at a stock brokerage firm where she earns $25 per hour. The office she works at is located downtown. To get to work each day, she must either ride a series of buses that takes one-and-a-half hours at a cost of $2, or take a cab that takes 30 minutes and costs $20. The opportunity cost:

of riding the bus is $27, and taking the cab is $20.

According to the textbook, the incentive to save M dollars on a product is

purely a question of whether it is worth it to do what is necessary to receive the M dollars of savings.

Economic models claim to be a(n)

reasonable abstraction of how people make choices, highlighting the most important factors.

Another name for the marginal benefit of an activity is the:

reservation price.

Jose is vacationing on Padre Island during Spring Break. He goes to the beach early on a sunny afternoon because he knows it will be crowded and he wants to have sufficient room to put out a large beach towel to lie on while sunning himself. Later that afternoon the beach fills to capacity and the family next to Jose raises a large beach umbrella to shade themselves from the sun. The shade from the umbrella also covered the area where Jose was lying. In this case, the sunlight was:

scarce because Jose would have to forego a place on the beach to receive the sunlight.

Decisions that involve doing something or not (like seeing a movie) and decisions that involve choosing a level (square footage of an apartment) are

similar, requiring a comparison of marginal benefits and marginal costs.

The cost-benefit principle:

states that an action should be taken only if the extra benefit is at least as great as the extra cost.

Steve has estimated that the marginal benefit of studying an additional hour of economics (instead of biology) is an increase of 15 points on the weekly test and the marginal cost is a decrease of 10 points on his weekly biology test. Applying the optimal quantity rule to maximize his test scores, he should:

study the additional hour of economics, plus some additional time studying economics.

With ATM machines it is possible to retrieve cash from the bank at any time. One hundred years ago, one could only get cash from the bank during business hours, say, 9 am to 3 pm. The difference is because

the cost of providing 24 hour a day service is much lower today.

Imagine a world with unlimited resources (including time). On this planet,

the cost-benefit principle would be irrelevant because tradeoffs would not exist.

Dean decided to play golf rather than prepare for his exam in economics that is day after tomorrow. One can infer that

the economic surplus from playing golf exceeded the surplus from studying.

Benny has one hour before bedtime and he can either watch TV or listen to his new Korn CD. He chooses to listen to the CD. The scarcity principle's influence on Benny is seen in

the fixed amount of time before bed.

Buying the 700 Mhz computer would be inconsistent with the cost-benefit principle because

the marginal benefit exceeds the marginal cost.

Maria spends her afternoon at the beach, paying $2 to rent a beach umbrella and $10 for food and drinks rather than spending an equal amount of money to go to a movie. The opportunity cost of going to the beach is:

the movie she missed seeing.

Janie must either mow the lawn or wash clothes, earning her a benefit of $30 or $45, respectively. therefore choose to _________ because the economic surplus is ________.

wash; greater

The scarcity principle indicates that

with limited resources, having more of "this" means having less of "that."

Rajiv has estimated that the additional benefit of writing 100 more lines of computer programming code is $10 and the additional cost is $6. He should:

write the code because it would be a rational choice but it is not an optimal quantity.

In order to properly ignore opportunity costs, the value of the next-best alternative and therefore all alternatives would have to be

zero.