Question 1

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending State College is:

Accepted Answer

If Larry attends State College, he not only has to pay $20,000 (= $30,000 - $10,000)in out-of-pocket expenses, but he also has to give up the value of his next-best option. To determine the value of his next best option, note that the value to Larry from attending Elite U (net of tuition)is $60,000 - $50,000 = $10,000. And, his value from attending NoName U (net of tuition)is $15,000 - 0 = $15,000. So going to NoName U is his next-best option, and his opportunity cost of going to State College is $20,000 + $15,000 = $35,000.

Question 2

You are trying to decide whether to purchase the latest Harry Potter book online or borrow it from the library. There is no charge for borrowing a book from the library, but going to the library takes more time than ordering a book online. Regardless of how you get the book, its benefit to you is the same. If the cost of buying the book online is $13, then you should:

Accepted Answer

The benefit to you of borrowing the book from the library is the $13 you save. Thus, you should borrow the book from the library if your cost of doing so is less than $13.

Question 3

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her ________ would be ________.

Accepted Answer

Mary's benefit from owning the truck is $15,000 and the cost is $12,000, so her economic surplus is $3,000.

Question 4

Alex received a four-year scholarship to State U. that covered tuition and fees, room and board, and books and supplies. If Alex becomes a full-time student, then:

Accepted Answer

Even though Alex has no out-of-pocket costs, by attending State U Alex would be giving up on 4 years worth of earnings.

Question 5

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:

Accepted Answer

Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.

Question 6

The cost-benefit model used by economists is:

Accepted Answer

Most people make sensible decisions most of the time.

Question 7

The Cost-Benefit Principle:

Accepted Answer

The Cost-Benefit Principle is not intended to exactly capture all features of human behavior. It just says that a rational decision maker should weigh costs and benefits.

Question 8

All else equal, relative to a person who earns minimum wage, a person who earns $30 per hour has:

Accepted Answer

All else equal, giving up a day of work "costs" the person who can earn $30 per hour more than it does someone who earns the minimum wage.

Question 9

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his economic surplus by attending:

Accepted Answer

To determine what Larry should do, determine the value of each option as if it were his only choice. In this case, the value to Larry from attending Elite U (net of tuition)is $60,000 - $50,000 = $10,000. His value from attending State College (net of tuition)is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition)is $15,000 - 0 = $15,000. Thus, his economic surplus will be the highest if he attends State College.

Question 10

Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is:

Accepted Answer

Opportunity cost is the value that must be foregone to undertake an activity. By going to the beach, Jen gives up the value she places on seeing the movie. We don't include the $12 she spends at the beach because she also would have spent that money at the movies.

Question 11

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. What is Larry's economic surplus from attending State College instead of his next best alternative?

Accepted Answer

The benefit to Larry of attending State College is $40,000. His cost of attending State College includes both $20,000 (= $30,000 - $10,000)in out-of-pocket expenses and the value of his next best alternative. To determine the value of this next best alternative, note that the value to Larry from attending Elite U (net of tuition)is $60,000 - $50,000 = $10,000. And, his value from attending NoName U (net of tuition)is $15,000 - 0 = $15,000. Thus, his next best alternative is NoName U, and Larry's economic surplus from attending State College instead of NoName U is $40,000 - $20,000 - $15,000 = $5,000.

Question 12

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is:

Accepted Answer

If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value of his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition)is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition)is $15,000 - 0 = $15,000. So going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.

Question 13

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending State NoName U is:

Accepted Answer

If Larry attends NoName U, he will not have any out-of-pocket expenses, but he will still have to give up the value of his next-best option. To determine the value of his next best option, note that the value to Larry from attending Elite U (net of tuition)is $60,000 - $50,000 = $10,000. And, his value from attending State College (net of tuition)is $40,000 - $20,000 = $20,000. Thus, going to State College is his next-best option, and his opportunity cost of attending NoName U is $20,000.

Question 14

Dean should play golf instead of preparing for tomorrow's exam in economics if:

Accepted Answer

People should choose actions that generate the largest possible economic surplus.

Question 15

If individuals are rational, they should choose actions that yield the:

Accepted Answer

Rational individuals should make decisions based on the Cost-Benefit Principle, which means taking those actions that yield the largest possible economic surplus.

Question 16

Economists believe the Cost-Benefit Principle is:

Accepted Answer

The Cost-Benefit Principle is seen as a simple but useful model of how people should make choices.

Question 17

Economists use abstract models because:

Accepted Answer

Economic models focus on the critical features of human behavior.

Question 18

The economic surplus of an action is:

Accepted Answer

Economic surplus is defined as the benefit of an action minus its cost.

Question 19

Suppose the most you would be willing to pay for a plane ticket home is $250. If you buy one for $175, then your economic surplus is:

Accepted Answer

The economic surplus of taking an action is its benefit minus its cost.

Question 20

The opportunity cost of an activity includes the value of:

Accepted Answer

The opportunity cost of an activity is not the total value of all possible activities that you could have pursued, but only the value of the one alternative you give up, which is presumably the next-best one.

Quiz 1: Thinking Like an Economist

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her would be .