Final Exam mix

cost-benefit principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.

willingness to pay

In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: “What is the most I am willing to pay to get this benefit (or avoid that cost)?

economic surplus

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

framing effect

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

The cost-benefit principle states that _____ are the incentives that shape decisions.

costs and benefits

The key to using the cost-benefit principle is to think about _____ aspects of a decision.

both financial and nonfinancial

Nerida Kyle could either commute to work via Uber or purchase a new car. The average cost of her one-way Uber trip is $15. Nerida works five days a week for 50 weeks a year. Based solely on avoiding the cost of an Uber, Nerida should purchase a car if the cost of the car is _____ than _____ per week.

less; $150

How is the economic surplus generated by a decision calculated?

It is the total benefits minus total costs arising from the decision. 

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte?

$4

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction.

both the buyer and the seller

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.

go; greater

Which principle tells you that the true cost of something is the next best alternative you have to give up to get it?

The opportunity cost principle.

Decisions should reflect the _____ costs, rather than just the _____ costs.

opportunity; financial

The opportunity costs of attending college include the:

potential income that could be earned working.

Jonathan Mendez is deciding whether to study for his economics exam at a café down the street or go to a concert a few cities over. The time spent commuting to the concert is ____ in his opportunity cost calculations and represents a _____ cost.

included; nonfinancial

The __________ suggests, decisions about quantities are best made incrementally. 

marginal principle

Joshua Murphy is planning on studying late into the night for his economics exam. How many cups of coffee should he buy tonight? 

Joshua should keep buying coffee throughout the evening until the marginal:

benefit of purchasing one more coffee equals the marginal cost.

Kathleen Alvarado is binge-watching her favorite show on Netflix. She is attempting to decide how many more episodes to watch. Kathleen should continue watching episodes as long as the marginal:

benefit of watching another episode exceeds the marginal cost.

According to the marginal principle, keep increasing quantity until the marginal benefit of an additional item is _____ the marginal cost of an additional item.

equal to

The principle that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future is known as the _____ principle.

interdependence

 Diana is a student studying economics and currently working on her class schedule for next semester. She decides to enroll in a course on economic data analysis because she knows that data analysis is a highly sought-after skill from employers in her career field. Weighing what may affect her in the future opportunities demonstrated dependency:

through time.

Dependencies between your own choices reflect the fact that:

you have limited resources.

An individual demand curve is a graph:

that plots the quantity of an item that someone plans to buy, at each price.  

Quantity demanded is on the horizontal axis when you plot a demand curve and shows the:

amount of a good that a person is willing to buy at each price.

When plotting a demand curve

price is on the vertical axis.

A downward-sloping demand curve implies:

there is an inverse relationship between price and quantity demanded.

Kathleen eats more steak when the price is low, and less when the price is high. shows?

law of demand

A rational buyer will:

keep buying a product until marginal benefit equals price.

Diminishing marginal benefit:

is when buying an additional item yields a smaller marginal benefit than the previous item.

The interdependence principle:

implies that buyers decisions are affected by many factors other than the price of an item.

A normal good is:

a good for which higher income causes an increase in demand.

Paint and paintbrushes are complements. If the price of paint rises, we can expect:

the demand for paintbrushes to decrease.

When you get hired for a well-paying job, you will most likely view older used cars as

inferior goods.

Which of the following would be considered in a cost-benefit analysis to decide if a person should cycle to work or ride the subway? \n \n (i) The air pollution that the cyclist has to breathe. \n (ii) The cost of subway tickets. \n (iii) The time it takes to cycle to work versus the time it takes to ride the subway to work. \n (iv) The cost per gallon of gasoline.

(i), (ii) and (iii)

The individual demand curve follows the **law of demand.** This means which one of the following?

A.When the price of the good falls, its quantity demanded remains the same.

The law of demand refers to

A.the inverse relationship between price and quantity demanded.

Suppose your marginal benefit of your first cup of coffee is $4, of your second is $3, and of your third is $2. If the price of coffee is $3, how many cups of coffee will you buy?

2 cups

Diminishing marginal benefit:

A.is when buying an additional item yields a smaller marginal benefit than the previous item. \`

You find that the marginal benefit of eating one more yogurt is greater than the price of the yogurt. You conclude that:

A.you will be better off if you eat one more yogurt.

Suppose you and your 99 classmates all have identical marginal benefits for coffee: the marginal benefit of the first cup is $4, of the second is $3, and of the third is $2. If the price of coffee is $3, what is the quantity demanded in the market?

200 cups

Consider the demand for socks. What would cause a movement from one point on the demand curve to a point further down the curve?

A big sale on socks

Determine whether each good is a normal good or an inferior good for the average consumer.



For most consumers, the newest iPhone is  _______ good.

a normal

Determine whether each good is a normal good or an inferior good for the average consumer.



For most consumers, a 10-year-old used car is  _______ good.

an inferior

Which one of the following pairs lists goods that are NOT substitutes?

car and gas

True or False? Network effects make goods and services LESS valuable the more people use them.

False

True or False? Congestion effects make goods and services LESS valuable the more people use them.

True

Which of the following would change market demand curves *without* shifting individual demand curves?

the number of buyers

Which of the following would cause the demand curve for ice cream to shift to the right?

A.A rise in the price of popsicles, a substitute for ice cream.

Which of the following factors would most likely cause a shift in the demand curve for candles?

A.Falling incomes, due to a weakening economy.

Which of the following would decrease the *quantity demanded* (move *along* the demand curve)?

A.an increase in the current price

individual supply curve

A graph plotting the quantity of an item that a business plans to sell at each price.

law of supply

The tendency for the quantity supplied to be higher when the price is higher.

perfect competition

Markets in which 1) all firms in an industry sell an identical good; and 2) there are many buyers and sellers, each of whom is small relative to the size of the market.\`

price-takers

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price.

variable costs

Those costs—like labor and raw materials—that vary with the quantity of output you produce.

fixed costs

Those costs that don’t vary when you change the quantity of output you produce.

Rational Rule for Sellers in Competitive Markets

Sell one more item if the price is greater than (or is equal to) the marginal cost.

marginal product

The increase in output that arises from an additional unit of an input, like labor.

diminishing marginal product

The marginal product of an input declines as you use more of that input.

market supply curve

A graph plotting the total quantity of an item supplied by the entire market, at each price.

movement along the supply curve

A price change causes movement from one point on a fixed supply curve to another point on the same curve.

change in the quantity supplied

The change in quantity associated with movement along a fixed supply curve.

shift in the supply curve

A movement of the supply curve itself.

increase in supply

A shift of the supply curve to the right.

decrease in supply

A shift of the supply curve to the left.

### Five Factors Shifting the Supply Curve

substitutes-in-production

Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.

complements-in-production

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises.

If the village of Happyville has 150 residents, of which 50 are children or senior citizens, 95 are working, and 5 are actively seeking work, the unemployment rate is:

5%

Jennifer, a teacher who is on two-month maternity leave but will return to work. is?

Employed

Suppose that due to a poor economy, 1 million workers lost their jobs, causing the unemployment rate to increase to 10%. After a few months of searching, 300,000 of these unemployed workers give up looking for work. How would the decision by these 300,000 people affect the unemployment rate, all else equal? 

The unemployment rate would decrease.

Chelsea was a manager at a vinyl records store who recently quit because she felt the recent popularity of vinyl is a current fad that will eventually fade away. She is now actively looking for a job in the hospitality industry. Chelsea is considered:

frictionally unemployed.

Suppose that the CPI in 2013 was 250 and the CPI in 2014 was 260. What is the rate of inflation in this economy?

b) 4.0%

In 2008, the rate of inflation was 2%, which then rose to 3% in 2009 before falling back to 2% in 2010. Between 2008 and 2009, the economy experienced _____ and between 2009 and 2010, the economy experienced _____.

inflation, disinflation

scarcity

Our inability to satisfy all our wants

choices/decisions

Because we face scarcity, we must make

incentive

a reward that encourages an action or



         a penalty that discourages an action.

Economics

the social science that studies the *choices* that individuals, businesses, governments, and entire societies make as they cope with *scarcity* and the *incentives* that influence and reconcile those choices.

Microeconomics

§the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.

Macroeconomics

§the study of the performance   of the national and global economies.

**Four core principles**

1\.the **cost-benefit principle**.



2\.the **opportunity cost principle**.



3\.the **marginal principle**.



4\.the **interdependence principle**.

**cost-benefit principle**

§says that you should



§evaluate the full set of costs and benefits of any choice.



§pursue only those choices whose benefits are at least as large as their costs.

**willingness to pay**

§how much you value the good.

**Economic surplus**

§the total benefits minus the total costs flowing from a decision.

Please select the economic term that is best described by each statement below.



*There are limited resources to satisfy all of society's wants.*

Scarcity

Please select the economic term that is best described by each statement below.



*Comparing the benefits and costs of engaging in an activity.*

trade-off

Suppose that you are willing to pay up to $15 to purchase a meal at your favorite restaurant. The meal currently costs $16.  Should you buy it?

A.no because the cost is higher than the benefit

Opportunity cost

§The true cost of something is the next best alternative you must give up to get it.

or what?

**sunk cost**

a cost that has been incurred and cannot be reversed

**production possibilities frontier** (PPF).

§illustrates the trade-offs you experience when deciding how to allocate scarce resources.

Instead of attending class, one could have worked an extra hour at the café for $10 or watched a neighbor’s child for $15.



The opportunity cost of attending class is:

$15

Lisa is choosing between three alternatives: 



a)working at her job that pays 60 dollars;



b)writing a term paper which she values at 40 dollars; or



c)going out with a friend, which she values at 80 dollars.



The opportunity cost of writing the term paper is:

$80

The price of gasoline is $2.50 per gallon at the closest gas station, but is only $2.30 per gallon at a gas station two miles away.

A.the value of one’s time and expenses to go to the farther gas station.

You paid $13 for movie tickets. But 30 minutes into the film, you’ve seen enough! The acting is terrible, the plot is predictable, and the jokes are cringe-worthy. Do you stay for the last hour?

A.No, $13 is a sunk cost, and the opportunity cost of the alternative use of the hour is higher than the benefit of staying in the movie.

If an economy is using its resources *efficiently*, then

A.more of one good can be produced only if production of another is given up.

Marginal benefit

§The extra benefit from one unit (of goods purchased, hours studied, etc.).

Marginal cost

The extra cost from one extra unit

***marginal principle***

§useful for “how many” decisions but not for “either/or” choices.

cost-benefit principle

§useful for “either/or” choices.

Rational Rule

§*If something is worth doing, keep doing it until your marginal benefit equals your marginal costs.*