Choice in a World of Scarcity

Bianca, a small oil producer is talking to her chief engineer, Pete, about repairs and upgrades to an oil well. Pete: "...additional upgrades on the well would cost $5,000 but would allow increased production and revenue of more than $10,000 per year." Bianca: "I already spent $20,000 on this well, it is a money pit; we should not spend anymore on it." Based on the information given, what is the sunk cost?

$20,000 spent on prior repairs

The local farmer's market offers 1 bag of romaine lettuce for $6 or 2 bags for $10. What's the marginal cost of the second bag?

$4

Suppose the relationship between your study time and your grade on a History midterm is given by the following table: If you study forYour grade will be 4 hours 82 5 hours 92 6 hours 93 What is the "marginal grade improvement (MGI)" of the 6th hour of studying?

1

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 suit 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 pair 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.

Suppose the relationship between your study time and your grade on a History midterm is given by the following table: If you study forYour grade will be 4 hours 82 5 hours 92 6 hours 93 What is the "marginal grade improvement (MGI)" of the 5th hour of studying?

10

Let's consider again our example of Stephanie who is planning a cruise to the Caribbeans and has a budget for new evening wear of $500. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. She found 6 pairs of shoes and 2 dresses she likes. She decides that she does need one more dress. What is the opportunity cost of buying a 3rd dress?

2 pairs of shoes

If Stephanie decides to buy 4 dresses, how many pairs of shoes can she afford?

2 pairs of shoes [$500-(4 dresses x $100)]/$50 = 2 pairs of shoes

The country of Mambia produces cars and TVs as laid out in the Production Possibility schedule below. What would be the opportunity cost of producing a fourth car (increasing production from 3 to 4 cars)? Cars (daily production in thousands)012345 TVs (daily production in thousands)2018151160

5 TVs

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. What is a combination of dresses and shoes that Stephanie could afford?

6 pairs of shoes and 2 dresses 6 pairs of shoes would cost (6x$50) $300 and 2 dresses would cost (2x$100) $200, adding up to $500

Consider the example presented above about Bianca, a small oil producer, trying to decide about investing more money into an oil well. If upgrades cost $5,000 but increase revenue will be more than $10,000 a year, what should Bianca do (assuming the $5,000 is available to her)?

Bianca should spend $5,000 on the well with the expectation that the additional revenue would outweigh the additional spending.

Indicate whether the following statement is normative or positive. Statement: The government should take measures to reduce inflation.

Normative

Indicate whether the following statement is normative or positive. Statement: The inflation should be kept at 0%.

Normative

Indicate whether the following statement is normative or positive. Statement: The inflation has been above 5% per year for the last 5 years.

Positive

Suppose that a family decides to spend all of their available money on a fancy vacation 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 family's preference for vacations over new automobiles

Raj and Annie, owners of a trucking company, are discussing opening a new distribution center and are analyzing the estimated cost and potential benefits of the project. Raj and Annie are behaving rationally because

Their decision is based on self interest

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

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 consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

assumption of rationality:

also called the theory of rational behavior, it is the assumption that people will make choices in their own self-interest

law of diminishing returns:

as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline

A positive statement is

can be shown to be correct or incorrect

positive statement:

conclusions based on logic and evidence that can be tested

normative statement:

conclusions based on value judgments that cannot be tested

sunk costs:

costs that are made in the past and cannot be recovered

marginal analysis:

examination of decisions on the margin, meaning comparing costs of a little more or a little less

productive efficiency:

given the available inputs and technology, it's impossible to produce more of one good without decreasing the quantity of another good that's produced

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 following statement given at a political rally: 'Poverty should be eliminated given the size of our economy; and that's a fact." This is normative because

it is expressing someone's values and opinions

Scarcity is imposed on individual households in the form of

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

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

marginal benefit

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

marginal benefit.

opportunity cost:

measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative

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.

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.

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.

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.

marginal cost:

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

marginal benefit:

the difference (or change) in what you receive from 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 the opportunity cost will be satisfying consumer wants.

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

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

Peyton and Paul are brothers who own a manufacturing business and are considering opening a new distribution center. They estimate that the project would add $5 million in expenses and that their profit would increase by $1.5 million per year for the next 5 years (other things equal). Peyton and Paul decide

to go ahead with the project because the expected marginal benefit ($7.5 million over 5 years) is greater than the estimated marginal cost of the project ($5 million).

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.

allocative efficiency:

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

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.