Microeconomics ch. 1

The benefit of taking an action minus its cost is known as

economic surplus

An implication of the Scarcity Principle is

people must make trade-offs

The incentive principle

predicts how people will behave

According to the incentive principle, when the costs of an action falls, a person

will be more likely to take the action

For Buzz, the benefit of drinking an add't 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 if greater than the cost ($3>$2.50)

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

False

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

surplus

If Sam gets $450 worth of benefit from growing 300 tomatoes in his garden, then his average benefit of growing a tomato is

$1.50. average benefit it the total benefit of undertaking n units of an activity divided by n (=$450/300)

Suppose you are considering whether to go to your 8am economics class. If you do not go to class you can either sleep an extra hour, which you value at $10, or you can go to the gym, which you value at $7. you opportunity cost of going to class is

$10

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 plus the value of whatever else you would have done for those 2 hours

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...

$31

Suppose you are considering whether to spend an add't hour studying for you 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 add't hour is

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

Economists believe that scarcity is

a fundamental fact of life for everyone

When assessing the cost and benefits associated with taking an action, it is generally best to consider costs and benefits

as absolute dollar amounts rather than proportions

People sometimes apply the cost-benefit principle incorrectly bc the evaluate costs and benefits...

as proportions rather than absolute dollar amounts

The total cost of carrying out n units of an activity divided by n is the activity's ______ cost.

average

Opportunity cost includes

both explicit and implicit costs

When making decisions, people sometimes make mistakes bc they...

fail to consider implicit costs

If someone is rational, then they

have well-defined goals that they try to fulfill the best they can

Suppose you plan to buy a new pair of running shoes. It's easier to buy them online, but the pair you want is $9 more expensive online than at the mall. According to the cost-benefit principle, you should buy them...where?

online if the convenience of buying them online is more than $9 to you

Opportunity Cost

the value of what be foregone to undertake an activity

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 bc it's a bigger dollar savings

The incentive principle asserts that a person

is more likely to take an action if its benefit rises, and less likely to take an action if its cost rises

A _______ economic principle is one that predicts how people will behave

positive

A normative economic principle....

says how people should behave

When deciding whether to take an action, sunk costs

should be ignored

Costs that are beyond recovery at the moment a decision is made

should not factor into the cost-benefit calculation

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

sunk cost

Suppose you pay $35 to reserve a camp sit 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. Seven days before your trip, you learn it's supposed to rain the whole time you had planned to camp, and you have second thoughts about going. Should the $35 you paid for the camp sit factor into your decision about whether to go camping?

No. The $35 is a sunk cost. The money is gone whether

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 salon 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 just cook whichever one sounds better to you.

The __________ ___________ principle states that an individual (firm, society) should take action if, and only if, the extra benefit from taking the action are at least as great as the extra costs

cost benefit principle

Economics is best defined as

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

Microeconomics is the study of

individual choice under scarcity and its implications for the behavior of prices and quantities in individuals markets

The _________ benefit of an activity in the increase in total benefit that results from carrying out one add't unit of the activity

marginal benefit

One common decision pitfall is to

measure costs and benefits as proportions rather than absolute dollar amounts

The cost-benefit principle is a _____ economic principle

normative

Economic models are _____ if people do not consciously weigh costs and benefits when making decisions

useful