Ch 1 - Thinking Like an Economist

Suppose that each police officer hired by the City of Gotham generates an average benefit to the community of $500 per week, and the average salary of police officers is $600 per week. Should the City of Gotham hire more or fewer police officers?

It's impossible to say Reason: Whether the City of Gotham should hire more, or fewer police officers depends on the marginal benefit and marginal cost of an additional police officer, but the question only gives information on average benefit and average cost.

Suppose you pay $35 to reserve a camp site at a local state park. The rules specify that you can only receive a refund if you cancel your reservation 2 weeks before your trip. Several days before your trip, you learn that it's supposed to rain the whole time you had planned to camp, and you are having second thoughts about going. Should the $35 you paid for the camp site factor into your decision about whether to go camping?

No At that point, the $35 you paid for the camp site is a sunk cost (regardless of whether you go camping, the $35 is gone). So, the $35 you paid for the camp site should not factor into your decision about whether to go camping.

One common decision pitfall is to

measure costs and benefits as proportions rather than absolute dollar amounts

The Incentive Principle asserts that a person ___.

is more likely to take an action if its benefit rises, and less likely to take an action if its cost rises. Reason: The Incentive Principle says that people generally respond to incentives.

A _ economic principle is one that says how people should behave.

normative

Anita knits scarves that she sells on Etsy.com. When she knits 12 scarves a week her total cost is $144, and when she knits 13 scarves a week, her total cost is $169. Thus, her marginal cost of knitting the 13th scarf is

$25 Marginal Cost Formula is: The change in cost divided by the number of units ($169-$144)/(13-12)= $25

Kimberly is studying for her math exam. If she studies for 5 hours, she'll get an 80, and if she studies for 6 hours, she knows she'll get a 90. Thus, the marginal benefit of the 6th hour of studying is __.

10 points Marginal cost formula: (90-80)/(6-5) = 10

When assessing the costs and benefits associated with taking an action, it is generally best to consider costs and benefits

As absolute dollar amounts rather than proportions.

Economic models are useful in explaining and predicting behavior only to the extent that people are consciously aware of those models when making decisions.

False Even when people do not consciously weight costs and benefits, people often do so unconsciously, often learning through trial and error which choices lead to the best outcomes. As a result, economic models are still useful in predicting behavior.

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. 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.

The increase in total cost that results from carrying out one additional unit of an activity is its _ cost.

Marginal

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.

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 your decision about whether to go to the concert (assume you have no way to sell your ticket to anyone else)?

No The $75 dollars are a sunk cost. The money is gone, and you cannot get it back.

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

Sunk Cost

In calculating opportunity cost, the textbook includes

both implicit and explicit costs.

When making decisions, people sometimes make mistakes because they

fail to consider implicit costs

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

ignore the implicit cost of the action.

The marginal cost of carrying out an activity is the

increase in total cost 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

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

is more likely to take the action.

If undertaking an activity includes both explicit and implicit costs, then, according to the textbook, the opportunity cost of that activity ___.

is the sum of its explicit and implicit costs

In standard economic models, a rational person

makes choices by weighing the extra benefits of an action against its extra costs.

An economic principle that says how people should behave is known as a

normative economic principle

A principle that predicts how people will behave is called a(n):

positive economic principle.

A positive economic principle ___.

predicts how people will behave

When making a decision, sunk costs ___.

should be ignored

When deciding whether to take an action, sunk costs

should be ignored.

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

sunk

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

surplus

Macroeconomics is the study of

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

The average benefit of carrying out an activity is ___.

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

The average cost of carrying out an activity is

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

Opportunity cost is

the value of what must be foregone in order to undertake an activity.