AP Econ Unit 1 Test

What is opportunity cost?

The value of the next-best alternative when a decision is made, which can be paid explicitly in dollars or implicitly in time and missed opportunities.

What do rational agents do?

They behave rationally and make optimal decisions.

How is opportunity cost calculated in a purchasing decision?

It is the value of the next best choice, not the total cost of all alternatives.

What do consumers seek in their purchases?

Consumers seek to maximize their satisfaction, known as utility.

What is utility measured in?

Hypothetical units called 'utils'.

What is the primary goal of firms compared to consumers?

Firms seek to maximize profit, while consumers seek to maximize utility.

What is cost-benefit analysis?

The process of comparing costs with benefits to inform a decision.

When do firms decide to proceed with an action?

Firms proceed if the benefit exceeds the cost.

What is marginal analysis?

The comparison of the costs and benefits of one more versus one less unit.

What does the principle of diminishing marginal utility state?

The additional satisfaction from consuming one more unit declines as consumption increases.

How is marginal utility defined?

The change in total utility generated by consuming one additional unit of a good or service.

What does a downward-sloping marginal utility curve indicate?

It indicates that utility decreases as more of a good is consumed.

What is the optimal consumption bundle?

The consumption bundle that maximizes total utility given a consumer's budget constraint.

What is the budget constraint?

A limitation on consumer spending based on total income.

What does the budget line represent?

All the consumption bundles possible when all income is spent.

What is the marginal dollar in consumer spending?

The additional utility gained from spending one more dollar on a good.

How is marginal utility per dollar calculated?

By dividing the marginal utility of a good by its price.

What is the Optimal Consumption Rule?

When maximizing utility under a budget constraint, the marginal utility per dollar spent on each good is equal.

What should be ignored when making decisions about future actions?

Sunk costs, which are costs that have already been incurred and are nonrecoverable.

What is an example of a sunk cost?

The cost of brake pads that have already been replaced on a car, which should not affect the decision to replace the entire brake system.

What is the relationship between total benefit and total cost?

Both consumers and firms aim to maximize the difference between total benefit and total cost.

What is the significance of the marginal utility curve?

It demonstrates how marginal utility changes with the quantity of a good consumed.

What happens when the marginal cost of an additional unit exceeds the marginal benefit?

It indicates that increasing the quantity further would not be optimal.

What is a consumption possibility?

The affordable consumption bundles accessible to a consumer.

What is the effect of limited income on consumer choices?

It constrains how much can be consumed, leading to trade-offs between goods.

Why is it important to consider marginal utility in consumption decisions?

To maximize total utility and make informed choices about resource allocation.

What does it mean if a consumer is indifferent to equal cost and benefit?

They have no preference between two options that yield the same cost and benefit.

How can consumers maximize their total utility?

By focusing on marginal utility and making decisions that increase it.