ECON494 - Ch 1

The total cost of carrying out n units of an activity divided by n is the activity's _______ (one word) cost

Average

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity

Marginal Cost

The increase in total cost that results from carrying out one additional unit of an activity

The opportunity cost of an activity includes the value of

The next-best alternative that must be forgone. The opportunity cost of an activity is not the total value of all possible activities that you could have pursued, but only the value of the one alternative you give up, which is presumably the next-best one.

If you graph the equation Y = a + bX with Y on the vertical axis and X on the horizontal axis, a(n) _____ will lead to an increase in the slope.

increase in b

The Cost-Benefit Principle states that an individual or society should take an action if, and only if

the extra benefits from taking the action are at least as great as the extra costs.

The average benefit of carrying out an activity is ______.

the total benefit of undertaking n units of an activity divided by n

A(n) _________ is a quantity that is free to take on different values.

variable

In the graph of a straight line, the value taken by the dependent variable when the independent variable is equal to zero is known as the

vertical intercept

The pitfall of ignoring implicit costs

When performing a cost-benefit analysis of an action, it is important to account for all relevant costs, including the implicit value of alternatives that must be forgone in order to carry out the action.

A(n) _____ is a quantity that is fixed in value.

constant

A formula is a mathematical expression that describes the relationship between two or more variables. (True false question)

false. An equation describes the relationship between two or more variables

The Scarcity Principle captures the notion that although we have boundless needs and wants, the resources available to us are limited, so

having more of one good thing usually means having less of another

Suppose you need to buy a new cell phone charger. You can buy one at a nearby store for $10, or you can buy one online for $8.50, but it'll take 2 days to arrive. If the cost to you of waiting two days to get the charger is $1, then your economic surplus from buying the charger online instead of at the store is:

$10 - ($8.50+$1) = .50

Chris is a potter who specializes in making mugs. When he makes 10 mugs a day his total cost is $90, and when he makes 11 mugs a day, his total cost is $121. Thus, his marginal cost of making the 11th mug is $______

$121 - $90 = $31

You are considering whether to go to see a movie. The movie lasts 2 hours and tickets are $15 each. Assuming there are no other costs associated with going to a movie, your opportunity cost of going to the movie is

$15 (explicit) plus the value of whatever else you would have done for those 2 hours (implicit)

You are either going to spend the evening studying at the library (an activity you value at $18) or you are going to go out to dinner with your friends (where you spend $16 on food). What is your opportunity cost of going out to dinner?

$16+$18 = $34

You are considering whether to knit a sweater for your mom's birthday. You estimate that the cost of the yarn and other materials will be $20. In addition, you estimate that it will take you about 30 hours to knit the sweater. Given that you value your time at $5 per hour, what is the opportunity cost to you of knitting the sweater?

$20 + ($5*30hours) = $170

You have two options for how to spend the afternoon. You can either go see a movie with your roommate or work as a tutor for the Math Department. From experience, you know that going to see a movie gives you $20 worth of enjoyment, and with your student discount, a movie ticket only costs $12. If you spend the afternoon working as a math tutor, you will get paid $45. On a typical day, you wouldn't be willing to spend the afternoon working as a math tutor for less than $35. What is your opportunity cost of seeing a movie this afternoon?

$22. The opportunity cost of seeing the movie is the $12 you pay for the ticket plus the forgone $10 ($45-35) in economic surplus you would have received from working as a tutor.

Suppose you plan to buy a new pair of running shoes. To buy them online, the pair costs $9. However, the value you had placed on the buying the shoes online is $12. Based on this information, your economic surplus from buying the shoes online is

$3. The benefit of buying the shoes online is $12 and the cost is $9. Thus the economic surplus is $12-$9 = $3.

Suppose you are considering whether to spend an additional hour studying for your economics midterm tomorrow. If you do not study you can either surf the web, which you value at $5, or you can talk to your roommate, which you value at $4. Your opportunity cost of studying for an additional hour is:

$5. The opportunity cost of an action is the value you place on the next best alternative.

For the fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you only eat 1 meal, your average cost for a meal is

$600. To find the average cost, divide the total cost by the number of meals. Here, $600/1 = $600.

If the equation C = 1 + 0.50H is graphed with C on the vertical axis and H on the horizontal axis, then the vertical intercept will be:

1

Kimberley is studying for her math exam. If she studies for 5 hours she knows she'll get an 80, and if she studies for 6 hours, she knows she'll get a 90. Thus, the marginal benefit of the 6th hour of studying is ______

10 points

The accompanying table shows how total donations, average donations, total labor costs, and average labor costs vary depending on the number of employees State U hires for its fundraising activities: #Employees Tot.Donations Ave.Donations Tot.Labor Ave.Labor 1 $ 30,000 $ 8,000 2 42,426 $ 17,000 3 $ 17,321 27,000 4 60,000 9,500 5 13,416 50,000 The president of State U decides to hire fundraising employees as long as their average benefit exceeds their average cost. This results in ______ employees being hired and a net benefit (total donations minus total labor costs) of ______.

5; $17080. Average benefit exceeds average costs for all 5 employees, so 5 employees will be hired. With 5 employees, total donations are $67,080 and total costs are $50,000, so the net benefit is $17,080 (= $67,080 − $50,000).

The Cost - Benefit Principle

An action should be taken if, and only if, its benefits exceed its costs

Suppose that the extra cost to Ava of a third glass of soda is zero because she's at a restaurant that gives free refills. According to the Cost-Benefit Principle Ava should

Drink a third glass of soda if the extra benefit of doing so is positive. According to the Cost-Benefit Principle, an individual should take an action if, and only if, the extra benefits of taking the action are at least as great as the extra costs. In this case, since the extra cost of a third glass of soda is zero, Ava should drink a third glass as long as the extra benefit of doing so is positive.

The study of how people make choices under conditions of scarcity and the results of those choices for society as a whole is called

Economics

You're trying to decide whether to go for a run. If you don't go for a run, you'll either watch TV or do your homework. Your opportunity cost of going for a run is

Either the value you place on watching TV or the value you place on doing homework, whichever is larger.

In order to use your local pool, you have to pay $15 per year, plus an additional $2 every time you go. If N is the number of times you use the pool each year, and F is the total dollar amount you pay to use the pool each year, then which of the following equations best describes this situation?

F = 15+2N

Economic models are useful in explaining and predicting the behavior only to the extent that people are consciously aware of those models when making decisions

False. Even when people do not consciously weigh costs and benefits, people often do so unconsciously, often learning through trial and error which choices lead to the best outcomes. As a result, economic models are still useful in predicting behavior.

Economics is best defined as the study of

How people make choices under conditions of scarcity and the results of those choices for society.

Suppose Sean makes 10 tables a month, each of which he can sell for $200. Given that the average cost of making each table is $150, should Sean make more or fewer tables each month? Multiple choice question.

It is impossible to tell. Sean should base his decision on the marginal cost and marginal benefit of making another table. The average cost of the table is not the same as the marginal cost of making a table. Thus, there's not enough information to determine what Sean should do.

The field of economics that would be most concerned with a recent fall in interest rates is

Macroeconomics. Macroeconomics focuses on overall national economic growth and factors that affect the overall economy such as the impact of changing interest rates on total spending in the economy.

The pitfall of measuring costs of benefits proportionally

Many decision makers treat a change in cost or benefit as insignificant it it constitutes only a small proportion of the original amount. Absolute dollar amounts, not proportions, should be employed to measure costs and benefits

A study that deals with the salaries of university professors would be considered

Microeconomics - the study of individual markets, such as the market for professors.

You are considering whether to fill out a mail-in rebate form for an item you just purchased. The total cost of filling out and mailing in the form is $8, and the rebate is worth $20. Should your decision about whether to send in the rebate form depend on whether the price of the item you purchased was $20 or $2000?

No. Although the rebate is 100 percent of the purchase price if the item was $20 and only 1 percent if the item was $2000, the benefit of mailing in the rebate is greater than the cost of mailing in the rebate ($20>$8), so you should mail in the rebate

Suppose you pay $35 to reserve a camp site at a local state park. The rules specify that you can only receive a refund if you cancel your reservation 2 weeks before your trip. Several days before your trip, you learn that it's supposed to rain the whole time you had planned to camp, and you are having second thoughts about going. Should the $35 you paid for the camp site factor into your decision about whether to go camping?

No. Several days before your trip, the $35 you paid for the camp site is a sunk cost (regardless of whether you go camping, the $35 is gone). So the $35 you paid for the camp site should not factor into your decision about whether to go camping.

Suppose you're trying to decide what to cook for dinner. Both the chicken and the salmon you have in your fridge are about to go bad, and whichever one you don't eat tonight, you'll have to throw away. In deciding which one to cook, should it matter to you that the salmon was slightly more expensive than the chicken?

No. The amount you spent on the food is a sunk cost and shouldn't factor into your decision. You should cook whichever one sounds better to you!

Suppose Warren, who owns a bakery, is deciding whether to increase his daily production of cakes. All of Warren's cakes sell for $40 each, and the average cost of making each cake is $35. Is this enough information to decide whether Warren should increase his production of cakes?

No. Warren should base his decision on the marginal benefit and marginal cost of making an additional cake, but the question does not tell us the marginal cost of making a cake. Average cost and marginal cost are not the same.

Every time you go to the grocery store, you try to wait in the shortest line. But the lines always seem to be roughly the same length. Why?

Other people are trying to choose the shortest line too. Applying the Incentive Principle, we would expect people to try to wait in the shortest line (where the time cost of waiting is the lowest). So, if one line happens to be shorter than the others, customers will quickly join that line.

Economics

Study of how people make choices under conditions of scarcity and of the results of those choices for society

A(n) ______ cost is a cost that is beyond recovery at the moment a decision is made.

Sunk

An individual (or a firm or a society) should only take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs. This describes

The Cost-Benefit Principle

Although we have boundless needs and wants, the resources available to us are limited, so having more of one good thing usually means having less of another. This is called

The Scarcity Principle

Economic Surplus

The benefit of taking an action minus its cost. Example: going to the movies benefit: $20 worth of excitement cost; $15 (opportunity cost) economic surplus: $5

Opportunity Cost

The value of what must be forgone to undertake an activity (includes both explicit and implicit costs) Example: going to the movies Ticket: $12 (explicit - out of pocket expense) Value of Watching TV: $3 (implicit - something you are giving up to go to the movies) Opportunity cost: $15

Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is

The value she places on seeing the movie. Opportunity cost is the value that must be forgone to undertake an activity. By going to the beach, Jen gives up the value she places on seeing the movie. We don't include the money she spends at the beach because she also would have spent that money at the movies.

You are considering whether to spend the evening watching TV or studying for your economics course. Your opportunity cost of watching TV is

The value you place on studying for your economics course. Both explicit and implicit costs (like the value you place on studying) should be considered when evaluating the opportunity cost of an activity.

The table below shows how the annual fee, F, to use your local pool depends on the number of days, D, you use the pool each year. If the annual fee is a linear function of the number of days you use the pool, and if you graph this line with the annual fee on the vertical axis and days on the horizontal axis, then the vertical intercept will be _____ and the slope will be _____. Fee($/year) Days(number/year) 30 10 45 20 60 30 75 40

To graph the line, you must find both the slope and the vertical intercept. The slope is found, for example, by noting that as D increases from 10 to 20, F increases from 30 to 45, implying that the slope is (45-30)/(20-10) or 1.5. Thus, for every day you use the pool, your annual fee increases by $1.50. The vertical intercept, a, is found, for example, by noting on the second row that 45 = a + 1.5(20), implying that a = 15.

Suppose Anaya owns a small business knitting scarves. The table below shows the number of scarves that Anaya can knit each week along with her total cost. If she knits 4 scarves per week, then her average costs is $_______ per week. Quantity of scarves Total Cost ($) 1 8 2 18 3 30 4 44 5 60

Total cost/quantity = $44/4 = $11 per week

Suppose you plan to buy a new pair of cleats and a new pair of shin guards at your local sporting goods store. You have a 10% off coupon for the cleats and a 50% off coupon for the shin guards. If soccer cleats are $70 and shin guards are $10, and the store will only accept one coupon per customer then what should you do?

Use the 10% off coupon for the cleats because it's a bigger dollar savings.

For Buzz, the benefit of drinking an additional cup of coffee is $3. If a cup of coffee costs $1.50, and if Buzz has to use $1 worth of his time to go buy the coffee, should Buzz drink another cup of coffee?

Yes. The benefit to Buzz of drinking another cup of coffee is greater than the cost ($3> $2.50)

In order to use your local pool, you have to pay $15 per year, plus an additional $2 every time you go. If you visit the pool 30 times this year, then your total annual cost of using the pool will be:

Your total annual cost of using the pool will be 15 + 2×30 = 75.

Economists believe that scarcity is

a fundamental fact of life for everyone.

Scarcity Principle (no-free-lunch)

although we have boundless needs and wants, the resources available to us are limited. Having more of one good thing means less of another

If you graph the line Y = a + bX with Y on the vertical axis and X on the horizontal axis, the slope is:

b

In calculating opportunity cost, the textbook includes

both implicit and explicit costs

Learning more about economic models

can help us make better decisions even if most people don't consciously use economic models to make decisions.

The value of a(n) _____ variable is determined by the value taken by another variable in the equation.

dependent

In the graph of a straight line, the vertical intercept is the value taken by the:

dependent variable when the independent variable is equal to zero.

A mathematical expression that describes the relationship between two or more variables is called a(n) _____________

equation

A variable that determines the value of another variable in an equation is known as a(n) _____ variable.

independent

The increase in total cost that results from carrying out one additional unit of an activity is its _______(one word) cost.

marginal

Suppose you're trying to decide whether to look for free street parking or pay $10 to park in a parking garage. You should

park in the parking garage if you'd be willing to pay at least $10 to avoid the hassle of finding street parking

The slope of a straight line is often calculated as the:

rise/run

When deciding whether to take an action, sunk costs

should be ignored

Along a straight line, the _____ is the ratio of the vertical distance the straight line travels between any two points to the corresponding horizontal distance.

slope

Which costs should be ignored when weighing the costs and benefits of an action?

sunk costs

Economic _____ is the benefit of taking an action minus its cost

surplus

The economic surplus of an action is

the benefit of taking an action minus its cost

The pitfall of failing to think at the margin

when deciding whether to perform an action, the only costs and benefits that are relevant are those that would result from taking the action.