Question 1

What is the relationship between the slope of the budget line and the notion of opportunity cost?

Accepted Answer

The slope of the budget line represents the opportunity cost of one good in terms of the other.Suppose we have two goods: fish and chips.If the price of fish (P_f)is $2 and the price of chips (P_c)is $8,then the price ratio −P_c/P_f = − 8/2 = − 4.This means that if I want 1 more unit of chips,I have to give up 4 more units of fish.Therefore,the opportunity cost of 1 unit of chips is given by the slope,− 4,in terms of the number of fish that has to be given up.

Question 2

If Larry starts a new pizza parlor and hires a manager for $30,000 per year,this implies that
A)pizza parlor managers are inexpensive to hire.
B)Larry values his labor at less than $30,000 per year.
C)Larry values his labor at more than $30,000 per year.
D)the price of pizza will increase if Larry works in the parlor himself.

Accepted Answer

Larry has chosen to hire a manager for $30,000 per year, indicating that he values his own labor at more than that amount. This suggests that he has skills or responsibilities that are worth more than what a pizza parlor manager typically earns.

Question 3

Wanda Weeks has decided to stay in a lower-paying position with a local electric company rather than accept a much higher-paying job with a new information technology company.Use a risk model to explain her decision.

Accepted Answer

Wanda is exhibiting risk-aversion.The risk model shows the trade-offs risk-averse individuals are willing to make between higher average salaries and greater variance in compensation.The more preferred job for a risk-averse individual is the job that offers the best package of both expected compensation and variance of compensation,not the position with the highest expected compensation.

Question 4

Robert only consumes X and Y,and his indifference curves have the usual convex shape.Consider the consumption bundles (3,9),(6,6),and (9,3)(Hint: The consumption bundles completely exhaust Robert's income).If Robert is indifferent between (3,9)and (9,3),then:
A)he prefers (3,9)over (6,6).
B)he prefers (9,3)over (6,6).
C)he prefers (6,6)over both (3,9)and (9,3).
D)he prefers (6,6)over (3,9)but not over (9,3).

Accepted Answer

If Robert is indifferent between (3,9) and (9,3), this means that the two consumption bundles give him the same level of utility. Since his indifference curves are convex, we know that he prefers bundles on a higher indifference curve to those on a lower indifference curve.

Now let's look at the consumption bundle (6,6). Robert can obtain this bundle by taking an equal amount of both X and Y. Since this bundle lies on a higher indifference curve than (3,9) and (9,3) (which are on the same indifference curve), we know that Robert prefers (6,6) to both (3,9) and (9,3). Therefore, the answer is C.

Question 5

Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car.How would understanding the concept of opportunity cost help her make a decision?

Accepted Answer

The answer of Stella Ann Freeman is having a difficult...

Question 6

It is commonly believed that the best ways to motivate an employee are (1)to improve the quality of the workplace and (2)to make the employee feel like he/she is part of the company.How would an economist analyze these statements?

Accepted Answer

The answer of It is commonly believed that the best...

Question 7

Robinson pays $100 for tickets to see his favorite sports team play.With 10 minutes left in the game,his team is losing heavily and has no chance of winning the game.Robinson chooses to stay until the end of the game because he wants to get the full value for his admission price.As an economist,you should advise Robinson to
A)stay until the end of the game as his intuition is correct.
B)stay until the end of the game as he might be heckled on the way out.
C)leave the game if his marginal benefit of leaving is greater than marginal cost,as the admission price is a sunk cost.
D)leave the game now as the line to exit the stadium is shorter now.

Accepted Answer

The admission price is a sunk cost, which means it cannot be recovered regardless of Robinson's decision to stay or leave. Therefore, Robinson should base his decision on the marginal benefit of staying until the end of the game compared to the marginal cost of doing so. Since his team has no chance of winning and the game is almost over, the marginal benefit of staying is likely to be low. If the marginal cost of staying (e.g. boredom, discomfort) outweighs the marginal benefit, Robinson should leave the game.

Question 8

You have $64 to spend on fish (F)and chips (C).Suppose the price per unit of fish (P_f)is $8 and the price of chips (P_c)is $2.Your utility function for fish and chips is given as such that and are the marginal utilities of F and C.How many units of C and F should you buy to exhaust all income and to maximize utility?

Accepted Answer

The answer of You have $64 to spend on fish...

Question 9

George likes skiing and needs one pair of bindings for each pair of skis he owns.George's indifference curves for skies and bindings
A)are approximately L-shaped.
B)are straight lines.
C)slope downward.
D)slope upward.

Accepted Answer

George's indifference curves for skis and bindings are L-shaped because he needs one binding for each ski, indicating perfect complements.

Question 10

Jim Range has to choose between buying more soda or more pasta for the week.He has a fixed income and he knows the prices of both products.Using indifference curves and budget constraints,illustrate the amount of soda and pasta that Jim will purchase.When he gets to the store,he finds that the price of soda has fallen dramatically.How does this change his optimal purchase? Can a general rule of human behavior be developed from this graphical example?

Accepted Answer

The answer of Jim Range has to choose between buying...

Question 11

Ali inherits $10,000 from his great-great aunt in 2008.His great-great aunt's will requires that Ali spend the money before December 31,2009.He has two spending options: He can either spend the amount in 2008 or in 2009.Suppose this is Ali's only source of income and the interest rate on loans or savings is 10 percent.
(a)How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2009 if he only consumes in 2009?
(b)What is the opportunity cost of consuming $1.00 in 2008 in terms of forgone consumption in 2009? Draw Ali's budget constraint and optimal consumption bundle,considering that the spending in 2008 is measured along the horizontal axis.
(c)Ali decides to spend $6,000 in 2008 and $4,400 in 2009.Show this optimal consumption bundle using a budget constraint and indifference curve diagram.

Accepted Answer

The answer of Ali inherits $10,000 from his great-great aunt...

Question 12

Marginal analysis refers to the
A)relationship between the cause and effect of an economic event.
B)study of trade relations based on absolute cost differences.
C)comparison of benefits and costs of choosing a little more or a little less of a good.
D)calculation of opportunity costs of an economic activity.

Accepted Answer

Marginal analysis evaluates the benefits and costs of choosing a little more or a little less of a good, considering the additional benefit and cost associated with marginal changes. It helps in making decisions about production levels, pricing, and resource allocation.

Question 13

Assume that the quantity of CDs is measured on the horizontal axis,while the quantity of movie tickets is measured on the vertical axis.If available income decreases,then
A)the horizontal intercept of the budget line decreases,while the vertical intercept remains unchanged.
B)the vertical intercept of the budget line decreases,while the horizontal intercept remains unchanged.
C)the budget line will shift inward.
D)the budget line will shift outward.

Accepted Answer

If available income decreases, the budget line will shift inward. This is because the consumer can no longer afford the same amount of both goods as before. The new budget line will show the combination of CDs and movie tickets that the consumer can afford with the reduced income, and it will be inside the original budget line. Neither the horizontal intercept nor the vertical intercept will remain unchanged.

Question 14

What does the tangency between an indifference curve and the budget line determine?

Accepted Answer

The answer of What does the tangency between an indifference...

Question 15

Assume Barbara likes driving fast,but hates getting injured.If Congress passes a law for mandatory airbags,Barbara is likely to experience an increased number of accidents.Why?
A)The benefits of driving fast increase.
B)The expected cost of an accident at any given speed decreases.
C)Barbara will defy the law and not have airbags,since she thinks no one is going to enforce installing airbags in cars.
D)Barbara is confident that she can drive flawlessly since others will have airbags.

Accepted Answer

With the mandatory installation of airbags, the expected cost of an accident at any given speed decreases since injuries and fatalities are likely to decrease. This may lead Barbara to take more risks while driving fast, thinking that the presence of airbags will protect her from harm. As a result, she may experience an increased number of accidents.

Question 16

Sunk costs refer to
A)costs that were incurred in the past and cannot be recovered and thus should not affect current decisions.
B)all the costs that a firm must incur in the process of production.
C)the costs that change proportionately with a change in the output.
D)the quantities of a good that are given up to obtain one unit of another good.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They should not be taken into account when making current decisions since they cannot be changed. Focusing on sunk costs can lead to irrational decision-making as they are irrelevant to future costs and benefits.

Question 17

Patrick consumes only two goods: Celtic Music concerts and Celtic Springs Water.Patrick earns $100 per month at his part-time job in the library.The price of Celtic concerts is $10.The price of Celtic Springs Water is $2.Patrick currently goes to 5 Celtic concerts and consumes 25 bottles of Celtic Spring Water in a month.
(a)Draw Patrick's budget constraint and optimal consumption bundle such that Celtic concerts are measured on the horizontal axis.
(b)In April,Patrick receives a 5 percent pay increase.Inflation raises the price of concerts to $10.50 and the price of Celtic Springs Water to $2.10.Draw Patrick's new budget constraint and optimal consumption bundle,considering that the number of Celtic concerts is measured along the horizontal axis.How many Celtic concerts does he attend in April? How many bottles of water does he drink in April?

Accepted Answer

The answer of Patrick consumes only two goods: Celtic Music...

Question 18

Marginal costs
A)are the incremental costs associated with making a decision.
B)are the expenditures already made that can't be recovered.
C)are not relevant when making an economic decision.
D)are costs that are usually classified under "miscellaneous."

Accepted Answer

Marginal costs refer to the additional or incremental costs that arise from producing or consuming one more unit of a good or service. These costs are relevant for decision-making as they provide information on whether or not to produce or consume additional units.

Question 19

Contrast the good-citizen model with the economic model to explain the reason why people engage in charitable behavior.

Accepted Answer

The answer of Contrast the good-citizen model with the economic...

Question 20

Assume that the quantity of X is measured on the horizontal axis,and the quantity of Y is measured on the vertical axis.Assume that the price of X is $3 and the price of Y is $6.If Amanda has $90 to spend on X and Y,then
A)she can buy,at most,30 units of good X.
B)her budget line has a slope of -2.
C)her budget line has a slope of −3.
D)she can buy,at most,15 units of good X.

Accepted Answer

Using the prices and budget, we can set up the following equation for the budget line:
3X + 6Y = 90
Solving for Y, we get:
Y = (90 - 3X)/6
This equation represents the maximum amount of good Y that Amanda can purchase for any amount of X. To find the maximum amount of X that Amanda can purchase, we want to find the point on the budget line where Y is zero. Setting Y to zero in the equation above, we get:
0 = (90 - 3X)/6
Multiplying both sides by 6, we get:
0 = 90 - 3X
Solving for X, we get:
X = 30
Therefore, Amanda can buy at most 30 units of good X.

Quiz 2: Economists View of Behavior

What is the relationship between the slope of the budget line and the notion of opportunity cost?

If Larry starts a new pizza parlor and hires a manager for $30,000 per year,this implies that

Wanda Weeks has decided to stay in a lower-paying position with a local electric company rather than accept a much higher-paying job with a new information technology company.Use a risk model to explain her decision.

Robert only consumes X and Y,and his indifference curves have the usual convex shape.Consider the consumption bundles (3,9) ,(6,6) ,and (9,3) (Hint: The consumption bundles completely exhaust Robert's income) .If Robert is indifferent between (3,9) and (9,3) ,then:

Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car.How would understanding the concept of opportunity cost help her make a decision?

It is commonly believed that the best ways to motivate an employee are (1)to improve the quality of the workplace and (2)to make the employee feel like he/she is part of the company.How would an economist analyze these statements?

George likes skiing and needs one pair of bindings for each pair of skis he owns.George's indifference curves for skies and bindings

Marginal analysis refers to the

Assume that the quantity of CDs is measured on the horizontal axis,while the quantity of movie tickets is measured on the vertical axis.If available income decreases,then

What does the tangency between an indifference curve and the budget line determine?

Assume Barbara likes driving fast,but hates getting injured.If Congress passes a law for mandatory airbags,Barbara is likely to experience an increased number of accidents.Why?

Sunk costs refer to

Marginal costs

Contrast the good-citizen model with the economic model to explain the reason why people engage in charitable behavior.

Assume that the quantity of X is measured on the horizontal axis,and the quantity of Y is measured on the vertical axis.Assume that the price of X is $3 and the price of Y is $6.If Amanda has $90 to spend on X and Y,then