Chapter 3

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You are considering renting a city apartment with​ 1,000 square feet for ​$1,800 per month. The monthly rent on a​ larger, 1,500-square-foot city apartment is ​$2,500. The marginal cost of renting an apartment with 500 additional square feet is ​_____ square foot per month.

$1.4 (2500 - 1800 = 700) --> (700/500 square ft = 1.4)

You are a professor of economics at a university.​ You've been offered the position of serving as department​ head, which comes with an annual salary that is ​$9,500 higher than your current salary.​ However, the position will require you to work 200 additional hours per year. Suppose the next best use of your time is spending it with your​ family, which has value of ​$40 per hour. What is the difference in the net benefit from becoming the department​ head? The change in net benefit is ​_____ ​(Enter your response as an integer.​) To​ optimize, you _____ become a department head.

$1500; should

You have been invited to play a​ 4-hour round of golf that has a value to you of ​$50. The total price to play the round of golf is ​$25. The net benefit of the round of golf is ​____. ​(Enter your response as an integer.​) Now assume that you have a job that pays you ​$6 per hour. Would you be optimizing to accept the invitation to play​ golf? To​ optimize, you should _____ golf.

$25; play

Reagan determined that the net benefit of taking the combination of two lecture courses and an online lecture course was​ $100. The same three courses online gave her a net benefit of​ $80, and all three in a​ lecture-based format gave her a net benefit of​ $90.

Optimization in​ levels, since she is comparing the net benefits between alternatives.

Optimization using total values includes

1. translate all costs and benefits into common units, like dollars per month 2. calculate the total net benefit of each alternative 3. pick the alternative with the highest net benefit

Which of the following statements regarding the principle of optimization is​ true? ​(Check all that apply.​) A. It is the unifying principle that connects various seemingly unrelated decisions. B. It means always choosing the best feasible option. C. It takes into account and evaluates multiple​ trade-offs. D. It applies only in the case of monetary and financial matters.

A. and C.

There is a proverb​ "anything worth doing is worth doing​ well." Do you think an economist would agree with this​ proverb?

No, because the marginal cost of extra effort may be greater than the marginal benefit

Some people choose to live close to the city​ center; others choose to live away from the city center and take a longer commute to work every day. Does this mean that those who stay away from the city center are being​ irrational?

No, because their opportunity cost of commuting must be lower.

Determine if the following statements better describe optimization in levels or optimization in differences. John is attempting to decide on a movie. He determines that the new Batman movie provides him with​ $5 more of a net benefit than the new Spiderman movie.

Optimization in​ differences, since he is calculating the change in net benefits between alternatives.

John is attempting to decide on a movie. He determines that the new Batman movie provides him with​ $5 more of a net benefit than the new Spiderman movie.

Optimization in​ differences, since he is calculating the change in net benefits between alternatives.

Nikki decided to take the first available parking space as she entered the student lot. She felt that the first available space had a​ $5 premium compared with all other possible spaces since she did not want to risk being late for her exam.

Optimization in​ differences, since she is calculating the change in net benefits between alternatives. Your answer is correct.C.

Marcia finds that the net benefit of flying from Chicago to Honolulu on a​ non-stop United Airlines flight is​ $400, and the net benefit for the same trip flying on a​ one-stop American Airlines flight is​ $200.

Optimization in​ levels, since she is comparing the net benefits between alternatives.

When optimizing for total​ value, opportunity cost must be _______ total cost . Assuming _____ benefits, the lowest cost option is the optimal choice.

added to; equal

net benefit

benefit minus cost

Since optimization is used to analyze​ people's choices and help them improve the outcomes of their​ choices, its

both normative and positive

In which of the following situations is optimization a good description of​ behavior? A. John is careless and irresponsible causing him to make a lot of mistakes in his work. B. Rita watches movies late at night. The next​ day, she wakes up late causing her to be late to her exam. C. Tia is a very fun loving person. She chooses to go on a vacation with friends instead of volunteering at NGO as a vacation is more enjoyable. D. ​Kat, the MIT business management​ graduate, starts his first business and incurs huge financial losses despite graduating from MIT.

c

Optimization in differences

calculates the change in net benefits when a person switches from one alternative to another and then uses these marginal comparisons to choose the best alternative

Optimization in levels

calculates the total net benefit of different alternatives and then chooses the best alternative.

Technique 1 optimization

calculates the total value of each feasible option and then picks the option with the greatest total value

Marginal analysis evaluates the _____ in net benefits when you switch from one alternative to another. Marginal analysis calculates the ____ of doing one step more of something.

change; consequences

behavioral economics

explains why people optimize in some situations and fail to optimize in others

Technique 2: Marginal Analysis

focuses on differences among the feasible options and finds the best option by analyzing the differences

Optimization using total value and optimization using marginal analysis give...

identical answers

If opportunity cost were to suddenly​ increase, total cost would

increase and net benefit would decrease (An increase in opportunity cost increases total cost and reduces net benefit. But this would make a new optimization analysis necessary as all options would change. OK)

When Janet looks at the additional value of purchasing a new laptop to the cost as compared to keeping her old​ one, she is using optimization based on

marginal analysis

Making an optimal decision involves....

multiple trade-offs

when an economic agent chooses the best feasible option, she is....

optimizing

Economist use optimization to predict most of the choices

people, households, businesses, and the government make

Principle of Optimization at the Margin

states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.

Optimization using marginal analysis calculates...

the change in total value when a person switches from one feasible option to another, and then uses the marginal comparisons to choose the option with the highest total value

Optimization is the process that describes​ __________.

the choices that peoplepeople make.

Total cost of rent includes ....

the direct cost of rent and indirect cost of commute time

Optimization using total value calculates....

the total value of each feasible option and then picks option with highest total value

Optimization in levels examines​ ___________, while optimization in differences analyzes​ ____________.

total net benefits of​ alternatives; the change in net benefits.

When John determines what choice of walking shoes will give him the best bang for his buck​, he is using optimization based on

total value

Whatever choices people face, economists believe that they will

try to choose optimally, but don't assume they always successfully or consistently optimize

Optimization using marginal analysis has three steps:

¥ (1) translate all costs and benefits into common units, like dollars per month; (2) calculate the marginal consequences of moving between alternatives; and (3) apply the Principle of Optimization at the Margin by choosing the best alternative with the property that moving to it makes you better off and moving away from it makes you worse off.

Does the principle of optimization imply that people always make the best​ choices?

​Yes, it is a good approximation for the decisions people make.


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