MACRO ECO CH1

According to the Incentive Principle, when the benefit of an action rises, a person

is more likely to take the action.

The increase in total benefit that results from carrying out one additional unit of the activity is called ______.

marginal benefit

One common decision pitfall is to ______.

measure costs and benefits as proportions rather than absolute dollar amounts

Economists believe that people

never have enough time, money, or energy to do everything or have everything they want.

Although we have boundless needs and wants, the resources available to us are limited, so having more of one good thing usually means having less of another. This is called ______.

the Scarcity Principle

Suppose you plan to buy a new pair of running shoes. To buy them online, the pair costs $9. However, the value you had placed on the buying the shoes online is $12. Based on this information, your economic surplus from buying the shoes online is _____.

$3 Reason: The benefit of buying the shoes online is $12, and the cost is $9. Thus, economic surplus is $12 - $9 = $3.

Aarav wants to read "The Wealth of Nations", by Adam Smith. He can either buy a copy at the bookstore near his house for $15, or bike across town and check it out from the public library. There is no charge to check books out of the library, but the hassle of biking across town would cost Aarav $7. What is Aarav's economic surplus from checking the book out of the library instead of buying it at the bookstore?

$8 Reason: The benefit of checking out the book from the library instead of buying it at the bookstore is $15, and the cost is $7. Thus, economic surplus is $15 - $7 = $8.

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

Blank 1: 25, twenty-five, $25, 25 dollars, or twenty-five dollars

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 $

Blank 1: 31, thirty-one, $31, 31 dollars, or thirty-one dollars

An activity's____________ benefit is the total benefit of carrying out n units of an activity divided by n. (Enter one word as your answer.)

Blank 1: average

The value of what must be foregone in order to undertake an activity is the___________cost of that activity. (Enter one word in the blank.)

Blank 1: opportunity

The study of how people make choices under conditions of scarcity and the results of those choices for society as a whole is called ______.

Economics

Which economic principle states that a person (or a firm or society) is more likely to take an action if its benefit rises, and less likely to take an action if its cost rises?

Incentive Principle

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?

It's impossible to tell. Reason: 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 Warren, who owns a bakery, is deciding whether to increase his daily production of cakes. All of Warren's cakes sell for $40 each, and the average cost of making each cake is $35. Is this enough information to decide whether Warren should increase his production of cakes?

NO Reason: Warren should base his decision on the marginal benefit and marginal cost of making an additional cake, but the question does not tell us the marginal cost of making a cake. Average cost and marginal cost are not the same.

Economists believe that scarcity is

a fundamental fact of life for everyone.

People sometimes apply the Cost-Benefit Principle incorrectly because they evaluate costs and benefits ______.

as proportions rather than absolute dollar amounts

The total cost of carrying out n units of an activity divided by n is the activity's_______________(one word) cost.

average

The Scarcity Principle applies to

everyone.

When making decisions, people sometimes make mistakes because they ______.

fail to consider implicit costs

The Scarcity Principle captures the notion that although we have boundless needs and wants, the resources available to us are limited, so

having more of one good thing usually means having less of another.

Economics is best defined as the study of

how people make choices under conditions of scarcity and the results of those choices for society.

When deciding whether to take an action, one common decision pitfall is to ______.

ignore the implicit cost of the action

The marginal benefit of carrying out an activity is the

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

Microeconomics is the study of:

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

The value of what must be foregone in order to undertake an activity is known as

opportunity cost.

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

sunk

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

sunk cost.

According to the Cost-Benefit Principle, an individual or society should

take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

The Cost-Benefit Principle states that an individual or society should take an action if, and only if

the extra benefits from taking the action are at least as great as the extra costs.

Macroeconomics is the study of

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

The average cost of carrying out an activity is

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

When people ignore the implicit cost of activities ______.

they tend to make the wrong choice