Ch 2 - Choice in a World of Scarcity

Which of the following statements is normative?

Congress gives too many tax breaks to corporations.

Which of the following statements reflects marginal cost?

If we order an additional dozen doughnuts, we will pay only $10 more.

Khloe is the owner of a wellness center in Los Angeles. Her business has been growing over three years and she is now considering expanding her business by adding a 'health cafe' in her center. Khloe is analyzing the estimated costs, projected potential revenue and costs and benefits of a cafe. Khloe is behaving rationally because

She is considering cost and benefits and her decision will be based on her self interest.

Which of the following statements is positive?

Social security benefits are not taxed.

In order to satisfy as many wants as possible, a society must achieve productive efficiency

because otherwise more could be produced.

A positive statement is

can be shown to be correct or incorrect.

Self-interest is not necessarily selfish, some say. In fact, self-interest likely includes an individual's consideration for

close friends and family.

The house that Jamalla inherited from her mother can rent for $2000/month, but Jamalla decides to allow her brother to stay there for $800. This decision carried with it a

zero monetary cost but a $1200 per month opportunity cost.

Danielle is planning a cruise to Mexico and has a budget for new clothes of $300. The average price for a pair of shoes is $50 while the average price for a dress is $100. Danielle already has 4 pairs of shoes purchased for her cruise, what is the opportunity cost of buying two more pairs of shoes?

1 dress The cost of 2 pairs of shoes is 2 x $50 = $100 which is the cost of 1 dress. So in order to add 2 pairs of shoes, Danielle has to give up 1 dress

Consider the Production Possibility Frontier for country X producing 2 groups of goods, MP3 players and watches. The opportunity cost of moving from the combination of MP3 players and watches B to C is

2 watches From B to C, the number of MP3 players increases by 5 but the number of watches produced goes from 6 to 4.

Juan has a monthly budget of $100 to spend on entertainment. A concert ticket costs $20 while a movie ticket costs $10. This month Juan has attended one concert and 5 movies so far. If Juan decides to only go to movies for the rest of the month. How many movie tickets can he afford to purchase and stay within his budget?

3 tickets

Which of the following statements reflects marginal decision-making?

Booking this condo in a better location is worth the extra $100

Identify the positive statement among the following statements.

College tuition is higher for out-of-state students than it is for in-state students.

Based on the graph of Maren's budget constraint for dresses and shoes, what accurately describes the slope of her budget constraint? Line looks like \ \

It is negative because of scarcity and the limited amount of money available to Maren. Because of scarcity, as you increase the number of dresses purchased, the number of shoes purchased has to fall, this leads to a negative relationship between the quantity of shoes and dresses purchased i.e a downward sloping budget constraint.

The additional benefit that one more unit of something will provide is known as

Marginal benefit. The additional benefits received when consuming one additional unit of a product or taking on a new course of action is defined as Marginal Benefits.

Stephanie is planning a cruise to the Caribbeans and has a budget for new evening wear of $500. She plans to purchase new shoes and dresses. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. Her current budget constraint is pictured in the graph. Stephanie catches an end of season sale on dresses and the average price of dresses falls to $50. As a result:

Stephanie will be able to afford more dresses for a given number of shoes.

It is said that the rational consumer will act according to his or her self-interest, and that self-interest can include a concern for one's family and friends, but not often society as a whole. Which of the following illustrates this type of decision?

The added expense of boat rental was worth it because of the additional fish caught, regardless of how little fish were left behind.

Imagine that a high school junior sold her old car at the end of the summer and now has the funds from the sale in her bank. She decides to purchase a much needed new automobile instead of saving that money to pay for her senior trip coming up next year. From an economist's perspective, which of the following statements about this decision is likely to be true?

The decision is rational in the sense that it reflects the junior's preference for a new automobile over a senior trip.

Imagine that a high school junior received a bonus check from his boss on the last day of his summer job. He decides to save all of that bonus check to pay for his senior trip coming up next year instead of purchasing a much needed new automobile. From an economist's perspective, which of the following statements about this decision is likely to be true?

The decision is rational in the sense that it reflects the junior's preference for a senior trip over new automobiles.

A restaurant chain sponsors a charity that provides support to the parents of children being treated for cancer. How would the use of company funds for this purpose be justified by a business whose goal is to maximize profit?

The money spent is worth the boost it gives to corporate image.

A local bank sponsors a charity run that raises funds for a non-profit building wells and schools in Mali, Africa. How would the use of the bank's funds for this fundraiser be justified when its goal is to maximize profit?

The money spent is worth the public relations boost it gives to the bank's image.

Two countries are trying to decide which product should have an increased production. Both Canada and Costa Rica produce coffee and corn, but it is easier for Canada to raise corn than grow coffee. Costa Rica easily grows coffee, but has a more difficult time growing corn. In comparison with Canada, Costa Rica has

a comparative advantage with coffee.

Dawnell is a skilled dancer. She is currently teaching modern dance full time for three high schools and makes $44,000 a year. She is now giving up her work and joining a touring dance company for the next two years. She will make $24,000 a year dancing, but gain much more in experience and connections. Dawnell's decision will result in

a two year opportunity cost of $40,000 after leaving her teaching position. The opportunity cost of 1 year is the earning she would be given up: ($44,000 - $24,000 = $20,000) So for 2 years, it would be $40,000

Kayden decided to attend college and gain a degree in accounting. He is now starting his degree. The yearly cost of tuition is $10,000 and he left his auto mechanic shop management job giving up a $32,000 a year to attend college. Kayden's decision resulted in

an opportunity cost to attend college of $42,000 per year.

A combination of clothing and cell phones that would meet the allocative efficiency would be:

any combination on the production possibilities frontier that brings the highest level of satisfaction to the people in the economy.

Making an economically rational decision requires

considering the prospective benefits and costs to oneself

A positive statement is always

devoid of value judgments.

Assuming there are only two types of outputs in a country: consumer goods and nuclear missiles. All else being constant, as the nation produces more missiles,

every additional missile will reduce consumer goods production by more and more.

Ayden is the sole proprietor of a shoe repair shop in Atlanta. His business has been increasing for five years and he is now considering opening a second repair shop downtown. Ayden is putting together a plan, estimating costs, projecting potential revenue of a second shop. Ayden is behaving rationally because

he is analyzing the costs and benefits of the decision, which will be based on his self interest.

The slope of a budget constraint line is influenced by

how much one product costs compared to the other.

An Uber driver estimates that he will make $300 on Fridays if he works all evening. He decides to stay home because $300 will not be enough to pay his car loan. His reasoning is ________ because ________.

incorrect; he should work and pay down his debt even if he cannot earn the entire car payment in one night.

The theory of rational behavior

is an assumption that economists make to have a useful model for how decisions are made.

A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mortgage of $3000/month, a sunk cost, must be paid. If the bed & breakfast operates, costs rise by $4000 per month, but revenue will be only $6000 per month. Until the building can be sold,

it is best to ignore sunk costs and keep the bed & breakfast operating.

Scarcity is imposed on individual households in the form of

limited income and the prices of the goods that a person may purchase.

To make an economically rational decision, marginal cost should be compared to

marginal benefit

A budget constraint model differs from production possibilities model in that, typically

only the production possibilities model demonstrates diminishing returns

The production possibilities model illustrates an inverse relationship between the quantity of two goods or services produced because

production of different products will compete for limited resources. As you need more resources to produce more of product A, automatically you will have less to produce product B. Therefore, if the production of product A rise, then the production of product B has to fall.

In order to satisfy as many wants as possible, it is necessary to achieve allocative efficiency,

since otherwise output may go to where it is less valued. If we are producing goods that are less valued at the expense of other goods that would be more valued, then we are not achieving allocative efficiency. Allocative efficiency refers to how well the mix of products reflects consumers' wants.

Marginal benefit is

the additional benefit that one more unit of something will provide.

Marcus is considering which college major to choose. In taking a rational approach, Marcus should consider

the benefit each major would bring and the cost of the degree.

Suppose that there are only two types of output in a country: nuclear missiles and consumer goods. All else being constant, as the nation produces more missiles,

the greater the opportunity cost will be of satisfying consumer wants. (As production of one product (missiles) increases, diminishing return start and as a result opportunity cost increases.)

Because of ________ if a city government decides to spend money on beautifying its downtown and attracting tourism to its city when no money has been devoted to those efforts before, then gains in tourism may be significant.

the law of diminishing returns

The agricultural extension agent told the farmer that one more crop-dusting will likely add a ton of additional wheat to the harvest. The rational farmer then calculated the selling price of a ton of wheat, since he would decide to crop-dust again if and only if

the marginal benefit is greater than the marginal cost of an additional crop-dusting.

The musician was known for multiple encore performances, but had limited stamina and a rational mind. Even she would eventually call it a night when, by her judgement

the marginal cost is greater than the marginal benefit of an additional encore.

A keynote speaker was known for his many speaking engagements, but now he has limited time and a rational mind. Even he would eventually start to turn down speaking engagement when, by his judgement

the marginal cost is greater than the marginal benefit of the next speaking engagement.

Hal and Gavin are siblings who own a mattress recycling company. Demand has been increasing for their services and the brothers are contemplating whether to open up an additional mattress drop off site in the downtown area. They estimate it would add $1 million in expenses with their profit increasing by $150 thousand each year for the next 5 years (all other things equal). Hal and Gavin decide

to not open a mattress drop off site downtown because the marginal costs proved to be too high.

Darian and Ivan have been friends since college. They started a limousine rental business from scratch in Philadelphia. They are now contemplating opening an additional location for their business in Baltimore. They have crunched the numbers and discover it would mean adding $2 million more in expenses, and their revenue would increase by $250,000 each year for the next 5 years (all other things equal). Darian and Ivan decide

to not open in a new city because the marginal costs proved to be too high relative to benefits.

Indi and Indrani are sisters who own a software development company. Demand has been increasing for their products and services and the sisters are contemplating whether to open up a satellite office in Austin. They estimate it would add $7 million in expenses and a profit of $12.5 million in total over the next 5 years (all other things equal). Indi and Indrani decide

to open a new office because the expected marginal benefit ($12.5 million over 5 years) is greater than the estimated marginal cost ($7 million).