Question 1

Which of the following is consistent with the implications of the economic guidepost that information is costly to acquire?

Accepted Answer

The answer of Which of the following is consistent with...

Question 2

To say that people make marginal decisions means that

Accepted Answer

Making marginal decisions means that people consider and weigh the additional costs and benefits of various activities before making a decision. They make decisions about how to allocate their limited resources by comparing the marginal benefits of an activity to the marginal cost of that activity. This helps them make informed decisions that maximize their satisfaction or utility.

Question 3

If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to

Accepted Answer

The airline company will want to make a profit from filling those empty seats, and since the marginal cost per passenger is $100, it would not make sense to charge a standby passenger less than $100. However, charging a stand-by passenger the full fare of $500 may not be the most profitable option, as it could deter potential customers who may want to wait for cheaper fares in the future. Therefore, the most profitable option would be to charge the stand-by passenger more than the marginal cost per passenger, but less than the full fare. Charging more than $100 but less than $500 would ensure that the airline company makes a profit from filling the empty seats while also appealing to price-sensitive customers.

Question 4

Standby passengers on airlines who pay low rates for seats benefit from the low price. How are the airlines affected?

Accepted Answer

Airlines benefit from standby passengers as long as the additional revenue generated by them exceeds the marginal cost of adding them to the flight. While the standby passengers may not cover the full cost of the seat, any additional revenue helps to offset the fixed costs of operating the flight. Therefore, the airlines benefit from standby passengers as long as the overall revenue generated exceeds the total costs including both fixed and variable expenses.

Question 5

In economics, secondary effects refer to the

Accepted Answer

Secondary effects are unintended consequences of a change that may not be immediately identifiable but are felt with time. These effects may be positive or negative and may involve changes in markets, industries, or society as a whole. They are important to consider when making economic decisions and policies.

Question 6

While waiting in line to buy one cheeseburger for $1.50 and a medium drink for $1.00, Sally notices that she could get a value meal that contains both the cheeseburger and medium drink and also a medium order of fries for $2.75. She thinks to herself, "Is it worth the extra 25 cents to get the medium fries?" To an economist, Sally's decision is an example of

Accepted Answer

Sally's decision to weigh the marginal cost of getting the medium fries against the marginal benefit of having them is an example of marginal decision making. She is considering the additional cost of 25 cents for the fries and deciding whether that cost is worth the additional benefit of having the fries.

Question 7

Harry, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, Harry should add fertilizer if it costs less than

Accepted Answer

To determine the cost at which Harry should add fertilizer, we need to calculate the marginal benefit and marginal cost of doing so. The marginal benefit is the increase in crop value per pound of fertilizer, which is:

Marginal Benefit = Increase in crop value / Amount of fertilizer
Marginal Benefit = ($100 - $80) / 1 pound = $20

Next, we need to determine the cost of adding fertilizer. Since the problem does not provide this information, we cannot calculate the actual cost. However, we can use the marginal cost as a proxy for the actual cost. The marginal cost is the cost of producing one additional unit of output, and in this case, it is the cost of adding one additional pound of fertilizer per acre. Assuming that the cost of other inputs remains constant, the marginal cost of adding fertilizer is the cost of the fertilizer itself.

Therefore, Harry should add fertilizer if the cost of one pound of fertilizer is less than the marginal benefit of adding that pound of fertilizer. Using the numbers we calculated above, this means that Harry should add fertilizer if the cost of one pound of fertilizer is less than $20.

Of the choices given, only option B ($20 per pound) satisfies this condition, so that is the best choice.

Question 8

People are more likely to purchase a consumer ratings magazine that reviews new automobiles before buying a new car than they are to purchase a consumer ratings magazine that reviews pens and pencils before buying a new pen or pencil. Which of the following best explains this behavior?

Accepted Answer

The value of the information, in terms of avoiding a mistake on the purchase, is much higher for an automobile than for a pen or pencil, making it more worthwhile to gather information from a consumer ratings magazine for automobiles.

Question 9

The decision makers described by economic analysis

Accepted Answer

Economic analysis suggests that decision makers aim to economize when seeking information, i.e., they try to obtain the most useful information at the lowest cost possible. Decision makers are assumed to have limited information and resources, and therefore, they must prioritize their efforts and resources to obtain the most relevant, reliable, and cost-effective information. This entails conducting a cost-benefit analysis of information gathering, as the costs of seeking information (including time, money, and opportunity costs) may exceed the benefits of obtaining additional information. Therefore, decision makers tend to seek a level of information that enables them to make informed and reasonable choices, given their constraints and objectives.

Question 10

Because information is costly to acquire,

Accepted Answer

Since acquiring information requires time, effort, and often money, people have to make decisions on what information is worth acquiring and what is not. Therefore, people will rationally choose not to become fully informed when making decisions, as the cost of acquiring all available information might outweigh the benefits.

Question 11

Susan wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $1.50 per gallon, the car wash costs $1, but if she buys 10 gallons of gasoline, the car wash is free. For Susan, the marginal cost of the tenth gallon of gasoline is

Accepted Answer

The cost of 9 gallons of gasoline is (9 x $1.50) = $13.50. With the car wash added, the total cost is $14.50. 
The cost of 10 gallons of gasoline is (10 x $1.50) = $15. With the free car wash added, the total cost is $15. 
Therefore, the cost of the tenth gallon of gasoline is ($15 - $14.50) = $0.50. The marginal cost is the additional cost of producing one more unit, which in this case is the cost of the tenth gallon.

Question 12

Just before class, Jim tells Stuart, "Stuart, you shouldn't skip class today because you have paid tuition to enroll in the class." Stuart ignores Jim's advice, and instead makes the decision of whether to attend based on what he feels he'd be missing that day in class relative to his value of the extra time he could have to finish the video game he is playing. To an economist, Stuart is

Accepted Answer

Stuart is using marginal decision making by weighing the benefit of attending class that day against the benefit of spending extra time on his video game. He is considering the additional benefit (or cost) of attending or skipping class at the margin, which is the incremental change in the benefit or cost of an action.

Question 13

A local restaurant offers an "all you can eat" Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?

Accepted Answer

The answer of A local restaurant offers an "all you...

Question 14

A firm producing cans buys three tons of aluminum per day at $200 per ton. If it buys four tons per day, it receives a quantity discount on all units and pays only $175 per ton. The marginal cost of the fourth ton per day is

Accepted Answer

The answer of A firm producing cans buys three tons...

Question 15

A restaurant offers an "all you can eat" lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if

Accepted Answer

The economic way of thinking suggests that one should continue to consume a good or service as long as the marginal benefit (additional benefit received from consuming one more unit) is greater than or equal to the marginal cost (additional cost of consuming one more unit). In this case, Jim should go back for the fourth serving if his marginal benefit of the additional serving (the additional satisfaction he receives from consuming one more serving) is greater than zero, because the cost (the additional amount he pays for the buffet) is already covered by the $12 he paid for the buffet. Therefore, option A is the correct choice.

Question 16

Ralph wants to buy some milk and a box of cereal. If Ralph buys 2 quarts of milk at $1 per quart, the box of cereal costs 75 cents. If he buys 3 quarts of milk at $1 per quart, the box of cereal is free. For Ralph, the marginal cost of the third quart of milk is

Accepted Answer

The first quart of milk costs $1.
The second quart of milk also costs $1.
The third quart of milk costs $1, but he also gets a free box of cereal which is worth 75 cents. Therefore, the marginal cost of the third quart of milk is $1-$0.75 = $0.25.

Question 17

According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study

Accepted Answer

The answer of According to marginal analysis, you should spend...

Question 18

If a decision maker uses marginal analysis, then the relevant costs are the

Accepted Answer

Marginal analysis focuses on the additional costs or benefits associated with an activity or product, not the full or average costs. Therefore, the relevant costs in marginal analysis are the additional costs, or the "marginal costs", of a particular activity or product. Choice E best reflects this concept.

Question 19

Economic analysis is based on the premise that

Accepted Answer

Economic analysis is based on the idea that people make decisions based on weighing the potential costs and benefits. Therefore, changes in personal costs or benefits will affect behavior in a predictable way. This idea is the foundation for much of microeconomic theory. While some people may act selfishly, this is not the premise upon which economic analysis is based. Additionally, it is generally accepted that individuals are not always fully informed when making decisions, but economic analysis still assumes that they are making choices based on the information they do have. Finally, while human behavior may be sometimes unpredictable, economic analysis attempts to provide insight into how people will generally act in response to changes in costs or benefits.

Question 20

While waiting in line to buy two tacos at 80 cents each and a medium drink for 90 cents, Jordan notices that the restaurant has a value meal containing three tacos and a medium drink all for $3. For Jordan, the marginal cost of the third taco would be

Accepted Answer

The cost of two tacos and a medium drink separately is $2.50 (2 x $0.80 + $0.90). The value meal containing three tacos and a medium drink costs $3. Thus, the marginal cost of the third taco would be the difference between the value meal and the cost of two tacos and a medium drink, which is $0.50. Therefore, the best choice is to purchase the value meal and save 50 cents.

Quiz 1: The Economic Approach