Economics 2
Which is a true statement about marginal cost?
It is the difference (or change) in cost of a different choice.
Julie's entertainment budget for the next six months is $150 per month. She enjoys watching the latest movies and loves the ballet. A movie ticket costs $15 while a ballet ticket costs $35. This month Julie already attended one ballet show and three movies. If Julie decides she would rather see ballet shows for the remainder of this month, how many ballet shows can she attend and stay within her budget?
Two ballet shows.
The slope of a budget constraint line is influenced by
how much one item costs compared to the cost of the other item.
Denasia is planning a cruise to the Bahamas and has a budget for new evening wear of $400. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. If Denasia already has 3 dresses purchased for her cruise, what is the opportunity cost of buying one more dress?
2 pairs of shoes
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.
Consider the graph of the production possibility frontier for country X. What would be a combination of watches and MP3 players that would meet the allocative efficiency of a country?
Any combination on the production possibilities frontier that brings the highest level of satisfaction to meet the needs of the people in the economy.
Consider the graph of the production possibility frontier for country Z below. A combination of clothing and cell phones that would meet the productive efficiency would be:
E
Consider the graph of the production possibility frontier for country X. What is a combination of MP3 players and watches that would be inefficient production for country X?
F
Consider the Production Possibility Frontier for country X producing 2 groups of goods, MP3 players and watches. The opportunity cost of one additional watch is
Greater at B than at C
Which of the following statements is normative?
Retired professionals should work less and get out more.
Maren 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. Maren 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 boat rental was worth the additional fish caught, regardless of how little fish we left behind.
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?
Three tickets.
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.
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.
In order to satisfy as many wants as possible, it is necessary to achieve productive efficiency
because otherwise resources are idle.
Self-interest is not necessarily selfish, some say. In fact, self-interest likely includes an individual's consideration for
close friends and family.
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 healthy 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
her decision will be based on her self interest.
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 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 costs and keep the bed & breakfast operating
The production possibilities model illustrates an inverse relationship between two goods or services 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 to where it is less valued.
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.
Marginal cost is
the cost of obtaining or producing one more unit of something.
The construction estimator told the storage unit owner that building another section of storage units will likely add 100 more storage space renters to the bottom line. The rational storage business owner considered the rental prices of an additional 100 units, but he would decide to add more units if and only if
the marginal benefit is greater than the marginal cost of additional units.
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.
Budget constraints impose scarcity. They are based upon
the prices of the items purchased.
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
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 prove to be too high.
Willa and Westley are siblings who built a hair salon business from the ground up. They are now contemplating opening an additional salon location. The estimate to open an additional salon would mean adding $1 million in expenses with their profit increasing by $400,000 each year for the next 5 years (all other things equal). Willa and Westley decide
to take on the new salon because the expected marginal benefit ($2 million over 5 years) is greater than the estimated marginal cost ($1 million).
Making an economically rational decision requires
weighing prospective benefits and costs to oneself.
A positive statement is always
without value judgments.
The house that Jeanne inherited from her mother can rent for $1500/month, but Jeanne decides to allow her brother to stay there for only $500 per month. This decision carried with it a
zero monetary cost but a $1000 per month opportunity cost.