Ch. 1 Thinking like an Economist

$2 (=$400/200)

If it costs Sarah $400 to make 200 Christmas's cookies, then her average cost of making a Christmas cooking is:

Ignore the implicit costs of their actions

People often fail to correctly apply the Cost-Benefit Principle because they

Often

People's behavior is _____ consistent with the Cost-Benefit Principle.

$31

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 _____.

Economic Surplus

The economic surplus from taking any action is the benefit of taking the action minus its cost

People generally will be less likely to take that action

When the benefit of an action goes down

$9 plus the value of the hour you spend at lunch

You are considering whether to go to lunch with a friend. Lunch will take about an hour and will cost $9. Assuming there are no other costs associated with going to lunch, the opportunity cost of going to lunch is

Sunk Cost

A cost that is beyond recovery at the moment a decision must be made.

Says how people should behave

A normative economic principle

Predicts how people will behave

A positive economic principle

With well-defined goals who tries to fulfill those goals as best he or she can

A rational person is someone

Sunk cost

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

Trade-offs are inevitable

Although we have boundless needs and wants, the resources available to us are limited. As a result,

Economic Surplus

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

How people make choices under conditions of scarcity

Economics is the study of

$3 (=$600/200)

If Sarah gets $600 worth of benefit from making 200 Christmas cookies, then her average benefit from making a Christmas cookie is:

Can help us make better decisions even if most people don't consciously use economic models to make decisions

Learning more about economic models

Positive Economic Principle

One that predicts how people will behave

Normative Economic principle

One that says how people should behave

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can.

It is impossible to tell (Sean should base his decision on the marginal cost and marginal benefit of making another table. The average cost of the table is not the same as the marginal cost of making a table. Thus, there's not enough information to determine what Sean should do.)

Suppose Sean makes 10 tables a month, each of which he can sell for $200. Given that the average cost of making each table is $150, should Sean make more or fewer tables each month?

$10

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. Your opportunity cost of going to class is:

Online if the cost to you of waiting 2 days is less than $1.50.

Suppose you need to buy a new cell phone charger. You can buy one at a nearby store for $10 or you can buy one online for $8.50, but it'll take 2 days to arrive. According to the Cost-Benefit Principle, you should buy the cell phone charger

$0.50

Suppose you need to buy a new cell phone charger. You can buy one at a nearby store for $10, or you can buy one online for $8.50, but it'll take 2 days to arrive. If the cost to you of waiting two days to get the charger is $1.00, then your economic surplus from buying the charger online instead of at the store is:

No

Suppose you pay $75 to buy a ticket to see one of your favorite bands next month. When the day of the concert rolls around, should the cost of the ticket figure into you decision about whether to go to the concert (assume you have no way to sell your ticket to anyone else)?

Use the 10% off coupon for the cleats because it's a bigger dollar savings. (10% of $70=$7; 50% of $10=$5)

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 guard. 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?

Normative economic principle

The Cost-Benefit Principle is an example of a _____ economic principle because it says how people should behave.

Marginal benefit

The ___ benefit of an activity is the increase in total benefit that results from carrying out one additional unit of the activity

Cost-Benefit Principle

The _____ Principle states that an action should be taken if, and only if, its benefits exceed its costs.

The total benefit of undertaking n units of an activity divided by n

The average benefit of carrying out an activity is

Opportunity cost

The opportunity cost of an activity is the value of what must be forgone to undertake the activity (plus the cost).

Opportunity Cost

The value of what must be foregone in order to undertake an activity is the _____ cost of that activity

True (Although the Cost-Benefit Principle says how people should behave, it's also often useful in predicting how they will behave.)

True or False: People's behavior is often consistent with the Cost-Benefit Principle

$15 plus the value of whatever else you would have done for those 2 hours. (Both explicit and implicit costs (like the value of your time) should be considered when evaluating the opportunity cost of an activity.)

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

$170

You are considering whether to knit a sweater for your mom's birthday. You estimate that the cost of the yarn and other materials will be $20. In addition, you estimate that it will take you about 30 hours to knit the sweater. Give that you value your time at $5 per hour, what is the opportunity cost to you of knitting the sweater?

$775

You are considering whether to take a few days off work to visit your best friend who lives in New York. You estimate that airfare plus other travel expenses will cost $575. In addition, you will have to use two vacation days, which you value at $100 each. Assuming there are no other costs associated with your trip, what is the opportunity cost of visiting your friend?

Microeconomics; Macroeconomics

_____ is the study of individual choice under conditions of scarcity and its implications for the behavior of prices and quantities of individual markets, while ___ is the study of the performance of national economies and the policies that governments use to try o improve that performance.

Marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity

Marginal Cost

the increase in total cost that results from carrying out one additional unit of an activity

Microeconomics

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

Macroeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance

Average benefit

the total benefit of undertaking n units of an activity divided by n

Average Cost

the total cost of undertaking n units of an activity divided by n