Chapter 9: Decision Making by Individuals & Firms – Flashcards
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a cost that involves actually laying out money
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Explicit Cost
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does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone
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Implicit Cost
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the business's revenue minus the explicit costs and depreciation
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Accounting Profit
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the business's revenue minus the opportunity cost of its resources.
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Economic Profit (Often less than the accounting profit.)
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the additional cost incurred by producing one more unit of a good or service
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Marginal Cost
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occurs when the cost of producing an additional unit is the same as the cost of producing the previous unit
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Constant Marginal Cost
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when marginal cost falls as the number of units produced increases
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Decreasing Marginal Cost
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the additional benefit earned from producing one more unit of that good or service
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Marginal Benefit
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the quantity that generates the maximum possible total net gain
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Optimal Quantity
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says that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost
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Principle of Marginal Analysis
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a cost that has already been incurred and is nonrecoverable
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Sunk Cost
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making a choice that is close to but not exactly the one that leads to the greatest possible economic payoff because the effort of finding the best payoff is too costly
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Bounded Rationality
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willingness to sacrifice some economic payoff in order to avoid a potential loss
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Risk Aversion
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a benefit foregone
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Cost
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a cost forgone
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Benefit
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Total Explicit Cost + Total Implicit Cost
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Total Opportunity Cost
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suppose a local hardware store has explicit costs of $2 million per year and implicit costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled
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94,000
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After earning your BA, you have to decide whether to take a job that will pay you $45,000 per year or spend an additional two years earning an MBA. If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000. You have been offered a scholarship for $10,000 per year, but to pay the remaining $22,000 per year, you would have to cash in savings bonds from your grandparents that have been earning $500 in interest per year. The annual opportunity cost of earning your MBA is
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$67,500
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You decide to quit your $60,000-per-year job as an information technology specialist and illustrate children's books. At the end of the first year of illustrating, you have earned $20,000. You also spent $5,000 for paint and paper. Your economic profit in the first year as an illustrator is:
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-$45,000
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According to the profit-maximizing principle of marginal analysis, if the marginal benefit is _____ the marginal cost, _____.
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Less than; an activity should be reduced
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Economists' and psychologists' attempts to understand and explain why people make decisions that appear to be irrational is the field of study called ________
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Behavioral Economics
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The "good enough" method of decision making is also called
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Bounded Rationalilty
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The relation between an individual's consumption bundle and her satisfaction is called a _________
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Utility Function
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To say that you can't have too much of a good thing means that for any good that you enjoy (for example, pizza):
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higher consumption will increase utility, but only up to a point; after that utility will start to decrease
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Which of the following goods is MOST likely to display increasing marginal utility over some range?
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paint, because you need enough to paint at least one entire room
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Xavier notices that the marginal utility of working with a tutor seems to fall with each hour the tutor helps him study. If Xavier keeps the tutor until his grade actually begins to fall, his marginal utility for the last hour of tutoring will be:
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Negative
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Which of the following best describes the principle of diminishing marginal utility? As an individual consumes more of a good:
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the addition to total utility obtained from the nth unit of the good will be less than that obtained from the immediately preceding unit of the good.
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Assume that the marginal utilities for the first three units of a good consumed are 200, 150, and 125, respectively. The total utility when two units are consumed is:
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350
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When total utility is at a maximum, marginal utility is:
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Zero (The slope of the total utility curve equals the marginal utility)
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Freddy has eaten three corn dogs at the county fair, and if he eats another, he will get sick on the roller coaster. Knowing this, and ignoring any impact that price might have on his decision, we can say that at the fourth corn dog the:
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marginal utility is less than zero.
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Assume that Siri is consuming the utility-maximizing quantities of pork and chicken. We can conclude that:
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the ratio of the marginal utility to price is the same for pork as it is for chicken
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The income effect of a price change is the effect on consumption changes as a result of a change in
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purchasing power caused by a change in the price of the good
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To maximize her grade in economics, Stacey should study until:
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her marginal benefit of studying equals her marginal cost of studying
