Econ exam 2 ch 9

Three reasons people might rationally choose a worse payoff

Concerns about fairness: Providing for others sometimes trumps self-interest. Bounded rationality—"good enough": Making a choice that is close to (but not exactly) the highest possible profit MAY MAKE SENSE because the effort of finding the best payoff is too costly. Risk aversion: Willingness to sacrifice some economic payoff in order to avoid a potential loss IS FAIRLY COMMON.

Unearned Social Security credits Forgone promotions Salary lost by not working Expenses for baby's room Loss of experience at work Depreciation of work skills Food and clothing for the child Loss of pension and 401k benefits Awards and kudos for excellence doing a paid job

IIIEIIEII

All of the following are considered implicit costs except: paying rent on an existing building. interest that could have been earned from the savings account if the money were not used on the existing business. the wages the entrepreneur could have earned if he or she chose to pursue a career in corporate America. forgone entrepreneurial income.

a

An implicit cost

does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone (e.g., wages forgone because of being a full-time student).

Economic profit

equals revenue minus the opportunity cost of all resources used. is usually less than accounting profit. shows a more complete picture of costs. helps businesses and individuals make better-informed decisions. is the measure economists prefer

An explicit cost

is a cost that requires an outlay of money (cost of books).

It can be easy to conclude that marginal cost and total cost ____?

must always move in the same direction

Marginal benefit

the additional benefit derived from producing one more unit of a good or service

Sandy owns a firm with annual revenue of $1 million. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur, Sandy could get a job with an annual salary of $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

-150000

Accounting profit

= revenue - explicit cost

six established decision-making mistakes.

Misperceptions of opportunity costs Overconfidence Unrealistic expectations about future behavior Counting dollars unequally Loss aversion 6. Status quo bias: the tendency to avoid making a decision altogether.

A rational decision maker

always chooses the available option that leads to the outcome he or she most prefers