Econ ch.1

You are the CEO of a car manufacturing company and realize that you may have to lay off 10,000 employees unless you take some other form of action. Your chief financial officer comes up with two solutions: The first saves 6,000 jobs, and the second causes the company to lose 4,000 jobs. The first option sounds ideal at first; however, both options give the same outcome of cutting 4,000 jobs and saving 6,000 jobs. This example represents the concept of:

framing effect.

An employer offers a potential employee $60,000, even though the employee would be willing to work for $45,000. The employer will make $70,000 from the work that the employee does. Assuming that the employee takes the job for $60,000, what is the employer's economic surplus?

$10,000

Select the items below that describe the field of economics. Economics: Is a social science Is a plan to buy everything Focuses on decision making Involves consumers and producers

- is a social science - focuses on decision making - involves consumers and producers

sunk cost

A cost that has been incurred and cannot be reversed. A sunk cost exists in whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs.

The interdependence principle

And we are particularly attuned to understanding how different decisions depend on each other.

Matthew has been diagnosed with cancer and doctors estimate that he has roughly 5 months to live. From an economic standpoint, which BEST explains why Matthew might be more likely than a healthy person to take a risky experimental drug?

His opportunity cost is lower than that of healthy people.

Angela owns a software company with 10 employees. Because she is not sure whether an 11th employee would improve her economic surplus, she hires another employee and notices that her total costs have increased by $1,250 and her total revenue has increased by $1,000. Which of these would be the best course of action for Angela?

Let the 11th employee go, or do not replace the next employee who quits.

is the difference between the consequences of making a choice and the consequences of the next best alternative.

Opportunity cost

Why do you need to do more than just calculate whether a financial profit will be made when you are deciding whether to start a new business?

The financial profits need to be at least as large as the opportunity cost of the investment of your time and money.

framing effect

When a decision is affected by how a choice is described, or framed. You should avoid framing effects altering your own decisions.

Which of these would indicate that in order to increase production of a good, you need to decrease production of another good?

You are producing at a point on your production possibility frontier.

"Reading this textbook will help establish a solid foundation for understanding concepts you will learn in more advanced economics courses." This statement is related to the__________principle

interdependence

A business owner is thinking about how many workers she should hire. She also thinks about whether she should purchase a larger building for these workers. Taking into account both of these decisions together is the essence of the _____ principle.

interdependence

"Each page that you read and each practice problem that you complete will help you increase your understanding of the material." This statement is related to the____________principle

marginal

Evie, a receptionist at a car dealership, asks herself the question, "Should I go back to school, or should I continue to work at the dealership?" The fact that she is comparing the idea of going to school with her next best option indicates that she is applying the _____ principle.

opportunity cost

You are weighing the cost of a cup of coffee against the satisfaction you will obtain from the coffee. Which economic principle are you taking into account?

the cost-benefit principle

You are trying to decide if you should buy a warmer coat but realize that the answer to this question will depend on whether you are taking a trip to Canada next month. Which economic principle is taken into account?

the interdependence principle

You are considering starting a sandwich shop but are comparing that to the idea of staying at your current job instead. Which economic principle are you taking into account?

the opportunity cost principle

You are willing to pay $4 for a cheeseburger. According to the cost-benefit principle, when should you buy a cheeseburger?

when the cost is less than or equal to $4

Your willingness to pay for new glasses is $130. According to the cost-benefit principle, when should you avoid buying new glasses and instead opt to keep your money?

when the price of the glasses exceeds $130

When someone asks whether they could improve their circumstance with a little more or less of something, they are taking into account the _____ principle.

marginal

Which of the following is NOT true of opportunity costs? - Not all out-of-pocket costs are real opportunity costs. - Opportunity costs do not always involve out-of-pocket costs. - Some out-of-pocket costs are opportunity costs. - All nonfinancial costs are opportunity costs.

All nonfinancial costs are opportunity costs.

Amancio is going into his fourth year of school when he is offered a prestigious position at a software company. Instead of applying the opportunity cost principal to see if he should quit school and take the job, he decides to stay in school, because he has already spent so much time and money on furthering his education. Amancio's hasty decision has been negatively affected by:

Sunk Costs

economic surplus

The total benefits minus total costs flowing from a decision. It measures how much a decision has improved your well-being.

"Reading this textbook will require time and effort, but doing so will help you improve your grade in this course." This statement is related to the______________principle

cost and benefits

If the marginal benefit of hiring one more worker is less than the marginal cost, then hiring an additional worker will:

decrease economic surplus.

"The time you will spend reading this textbook can also be used to study for your chemistry exam." This statement is related to the________principle

opportunity cost

Which of these BEST describes what people should base their decisions on?

opportunity costs

The opportunity cost principle

Before making a choice, we consider the alternatives, asking: "Or what?" To apply the opportunity cost principle correctly, just make sure that whenever you pose a question, the word OR appears in the middle of it.

Four lessons about opportunity costs: Some out-of-pocket costs are opportunity costs. Opportunity costs need not involve out-of-pocket costs. Not all out-of-pocket costs are opportunity costs. Some nonfinancial costs are not opportunity costs.

Four lessons about opportunity costs:

cost-benefit principle

We consider the costs and benefits of a choice

Willingness to pay allows you to put costs and benefits in the same units, making it easier to:

apply the cost-benefit principle.

The marginal principle.

We think at the margin, always asking whether a bit more or a bit less of something would be an improvement

Which of these would best be described as the foundation of all economic forces?

Choices

Consider the following statement: "Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money." Is this statement true or false?

False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making.