Econ 101: Chapter 9

What is a sunk cost?

A cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions

What is bounded rationality?

A decision maker makes a choice that is close to but not exactly the one that leads to the best possible economic outcome Is the "good enough" method of decision making

What i the difference between accounting profit and economic profit?

Accounting profit- is equal to the revenue minus expenditures Economic profit-is equal to the revanue minus the opportunity cost of resources used. It is usually less than the accounting profit Calculating the economic profit leads to the best economic outcome for someones needs Economic profit of a project is generally less than an accounting profit because there are almost always implicit costs in addition to explicit costs

What is the difference between an either-or, & and a how much decision?

An either-or decision is one in which you must choose between two activities How much decisions require you to choose how much of an activity to undertake

What is capital, and does capital have an opportunity cost?

Capital-is the total value of assest owned by an inidividual or firm-physical assests plus financial assests Capital does have an opportunity cost

What are the three principal reasons why people might prefer a worse economic payoff?

Concerns about fairness bounded rationality risk aversion

What is a irrational decision?

Decision maker choose an option that leaves him or her worse off that choosing another available option

What is the difference between an explicit and implicit cost?

Explicit cost-a cost that requires an outlay of money Ex: the explicit cost of an additional year of schooling requires tuition Implicit cost-does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone Ex: the implicit cost of the year spent in school includes the income that you would have earned if you have taken a job instead

What is loss aversion?

Is an oversensitivity to loss, leading to unwillingness to recognize a loss and move one

What is mental accounting?

Is the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others

What is risk aversion?

Is the willingness to sacrifice some economic payoff in order to avoid a potential loss

What is a marginal cost curve?

It is a curve that shows how the cost of producing one more unit depends on the quantity that has already been produced

What is the implicit cost of capital, or the opportunity cost of capital?

It is the opportunity cost of the use of one's own capital-the income earned if the capital has been employed in its next best alternative use Due to the implicit cost of capital-the opportunity cost of using self-owned capital-and the opportunity cost of one's own time, economic profit is often substantially less than accounting profit

What is optimal quantity?

It is the quantity that generates the highest possible total profit It is the quantity at which the marginal benefit is equal to the marginal cost It is the quantity at which the marginal benefit and marginal cost curves intersect

What is the marginal benefit curve?

Shows how the benefit from producing one more unit depends on the quantity that has already been produced

What is the difference in ways that you select the optimal quantity for small and large quantities?

Small Quantities- increase the quantity as long as the marginal benefit from one more unit is greater than the marginal cost, but stop before the marginal benefit becomes less than the marginal cost Large Quantities-The optimal quantity is the quantity at which marginal benefit is equal to marginal cost

What is marginal benefit?

The additional benefit derived from producing one more unit of that good or service

What is the status quo bias?

The status quo bias is the tendency to avoid making a decision and sticking with the status quo

What is a decreasing marginal cost?

When each additional unit costs less to produce than the previous one Marginal cost line is downward sloping Often due to learning effects in production: for complicated tasks, such as assembling a new model of a car, workers are often slow and mistake-prone when assembling the earliest units, making for higher marginal cost on those units. But as workers gain experience, assembly time and rate of the mistakes fall, generating lower marginal cost for later units. As a result overall production has a decreasing marginal cost

What is an increasing marginal cost?

When each additional unit costs more to produce than the previous one When displayed on a chart the curve is upward sloping

What is a constant Marginal Cost?

When each additional unit costs the same to produce as the previous one Ex: plant nurseries, for example, typically have constant marginal cost-the cost of growing one more plant is the same, regardless of how many plants have already been produced The marginal cost curve is a horizontal line

What is decreasing marginal benefit?

When each additional unit of the activity yields less benefit than the previous unit Producing one more unit of the good or service falls as the quantity rises

What is the profit-maximizing principle of marginal analysis?

When faced with a profit-maximizing "how much" decision, the optimal quantity at which the marginal benefit is greater than or equal to marginal cost Applicable to production, consumption, and policy decisions

What is the principle of "either-or" decision making?

When faced with an either-or choice between two activities, choose the one with the positive economic profit

What is a rational decision?

maker chooses the available option that leads to the outcome he or she most prefers It can be entirely rational to choose an option that gives you a worse economic payoff because you care about something other than the size of economic payoff.