Module 1

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 cost.

Jody has purchased a non-refundable $25 ticket to attend a Savage Garden concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, she should

include only the entertainment value of the concert in the opportunity cost of going on the date.

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

largest economic surplus

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.

Chris has a one-hour break between classes every Wednesday. Chris can either stay at the library and study or go to the gym and work out. This is

an economic problem, because the one-hour time limit means Chris must make a choice.

Most people make some decisions based on intuition rather than calculation. This is

consistent with the economic model because people intuitively compare the relative costs and benefits of the choices they face.

You had to pay $600 (non-refundable) for your meal plan for Fall semester which gives you up to150 meals. If you eat only 100 meals, your marginal cost for the 100th meal is

0

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. 10. What is your economic surplus if you go to work on Saturday?

1

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. The opportunity cost of attending State College is

15000

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. What is the opportunity cost of going to the concert?

36

Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The total cost (money cost plus opportunity cost) of seeing the movie is

37

You had to pay $600 (non-refundable) for your meal plan for Fall semester which gives you up to 150 meals. If you eat only 100 meals, your average cost for a meal is

6

Sam and Adam are friends. Sam earns minimum wage at McDonalds and Adam earns $30 per hour as a machinist at a local factory. They both have Sundays off. They hang out together on Sundays and sometimes they watch a movie. A movie ticket costs $12 at the theater. Which of the following statements about the cost of the movie is correct

Adam has a higher cost of watching the movie because his opportunity cost of time is greater.

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

Jenna overestimated the benefits of the movie.

Mike, a whitewater rafting instructor, pays a non-refundable $100 to ACE Adventure to reserve a raft for a group whitewater rafting trip in the New River. The raft has room for 5 people. Mike usually sells 4 rafting tickets at $25 each and goes on the trip for free. But this time, he could only sell 3 tickets at $25 each for a total of $75. These amounts will have to be refunded by Mike if he cancels the trip. Should Mike cancel this trip

No, because losing $25 is better than losing $100

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. Should you go to the concert instead of working Saturday?

No, your benefit is less than your cost

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his surplus by attending

State College, because the difference between the benefit and cost is greatest there.

Which of the following decisions would not be part of microeconomics? How to make the largest profit. Whether to study or watch TV tonight. How an early freeze in California will affect the price of fruit. Whether the federal budget should always be balanced.

Whether the federal budget should always be balanced.

Your scholarship depends on your maintaining a 3.5 cumulative GPA. Your GPA for last semester was 3.6, which brought your cumulative GPA down. What must be true?

Your marginal grades were lower than your overall GPA.

The incentive principle is an example of

a positive economic principle.

Normative economics is concerned with how people _________ make decisions while positive economics is concerned with how people __________ make decisions.

should; do

The incentive principle states that a person is more likely to do something if

the benefits from doing it increase.

Alex received a four-year scholarship to State U that covered tuition and fees, room and board, and books and supplies. As a result

the cost of attending State U is the amount of money Alex could have earned working for four years.

Dean should play golf instead of preparing for tomorrow's exam in Economics if:

the economic surplus from playing golf is greater than the economic surplus from studying.

Economists use abstract models because

they are useful for describing general patterns of behavior.

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

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

The scarcity principle indicates that

with limited resources, having more of something means having less of something else.