Chapter 2- Choice in a World of Scarcity

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Which of the following statements is/are reflecting decision-making on the margin?

-One more day in this cottage will be nice, but how much will the cost of the rental rise? -If we double the order to a dozen doughnuts, we will pay only twenty percent more.

Identify the positive statement(s) among the following statement(s).

-The federal government budget deficit reached 4% of GDP last year. -The federal government spending is greater than revenue to the Treasury.

The theory of rational behavior

-assumes that people will always attempt to act in their own self-interest. -is an assumption that economists make to have a useful model for how decisions are made.

Which of the following statements reflects marginal decision-making?

-if we double the order to a dozen donuts, we will only pay 20% more

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

-since otherwise resources are idle. -since it would be impossible to produce more of one thing without producing less of another.

Marginal benefit is

-the additional benefit that one more unit of something will provide. -the change in the total benefit that one more unit of something will provide.

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 boat rental was worth the additional fish catch, regardless how little fish we left behind -the rental of recreational vehicles for use in national parks is responsive to the price charged, but not to concerns of noise pollution

Budget constraints impose scarcity , and are based upon

-the limitation of the budget. -the prices of the items purchased.

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 that the marginal benefit of an additional encore

Budget constraints impose scarcity, and are based upon

-the prices of the items purchased -the limitation of the budget

A filtration improvement has been proposed for the old water plant that serves the entire city. Water rates have been only 2 cents per gallon, but with the improvement, the rate would be 5 cents per gallon.

Are the additional benefits of cleaner water worth paying 3 more cents per gallon?

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

C close friends and family.

Which of the following three statements are normative?

Congress gives too many tax breaks to corporations.

It is said that the rational consumer will act according to their 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 boat rental was worth the additional fish catch, regardless how little fish we left behind.

production possibilities frontier (or curve)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available

budget constraint

all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent

positive statements

are objective; they describe the world as it is

normative statements

are subjective; they describe the world as it ought to be

law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline

A positive statement is

can be shown to be correct or incorrect

Self-interest can include more than a concern for oneself. To the extent that the happiness of others contributes significantly to the our own happiness, actions taken in our own self-interest may have benefits for

close friends and family

marginal analysis

comparing the costs and benefits of a little more or a little less

Which of the following three statements is normative?

congress gives too many tax breaks to corporations

Making an economically rational decision requires

considering the prospective benefits and costs to oneself

After cost overruns of the solar project, $10 million was already spent and unrecoverable. It was going to cost $12 million more in order to complete the project, and now society somehow needs to make the rational choice to

continue with the project provided that the additional solar electricity is worth more than $10 million.

sunk costs

costs that are incurred in the past and can't be recovered

A positive statement is always

devoid of value judgements.

The slope of a budget constraint line is influenced by

how much one item costs compared to the cost of the other item

marginal benefit

is the difference (or change) in what you receive from a different choice

opportunity cost

is the value of the next best alternative

A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mortgage of $3000/month must be paid, since it is a sunk cost. If the restaurant 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 cost and keep the bed & breakfast operating

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

marginal benefit

The production possibilities model is illustrates an inverse relationship between two goods or services because

production of different types will compete for limited resources

The production possibilities model is illustrated with a negatively sloped line because

production of different types will compete for limited resources.

The production possibilities model shows an inverse relationship between the amount of one thing that can be produced and the amount of something else because

production of different types will compete for limited resources.

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

since otherwise output may go where it is less valued

Which of the following statements is positive?

social security benefits are not taxed

Rational decision-making ignores any consideration of:

sunk costs

An Uber driver faces costs for driving that include sunk costs like insurance that contribute to the average cost per mile of $.50. Yet when a rider offers to pay less than that for a ride, the driver agrees because

sunk costs like auto insurance (in this case) do not increase as driving increases

comparative advantage

the ability of a group or country to produce a good or service at a lower opportunity cost than another group or country

Assumption of Rationality

the assumption that people will make choices in their own self-interest, choosing things that provide the greatest personal benefit and foregoing those that aren't as personally valuable and compelling; also called the theory of rational behavior

Marginal cost is

the cost of obtaining or producing one more unit of something

marginal cost

the difference (or change) in cost of a different choice

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 opportunity cost will be of satisfying customer wants

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 is worth the boost is gives to corporate image

Scarcity is imposed on individual households in the form of income and

the prices of the goods that we may may purchase

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

the production possibilities model demonstrates diminishing returns

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 production possibility frontier

Normative statements are based upon

value judgements.

productive efficiency

when it's impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

allocative efficiency

when the mix of goods being produced represents the mix that society most desires

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

zero monetary cost but a $1000 per month opportunity cost


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