Chapter 3

Question 1

Economics is the study of

Answer 1

choice

Question 2

Two kinds of optimization

Answer 2

Optimization in levels and optimization in differences - both techniques of cost benefit analysis

Question 3

How do the results of optimization in levels and optimization in differences differ?

Answer 3

They don’t.

Question 4

Optimization in levels

Answer 4

Calculates the total net benefit of different alternatives, and then chooses the best alternative

Question 5

Optimization in differences

Answer 5

Calculates the change in net benefit when one switches from one alternative to another, then uses these marginal comparisons to choose the best alternative

Question 6

Which type of optimization is faster and easier? Why?

Answer 6

Optimization in differences. Allows you to focus on the differences between options.

Question 7

Behavioral economics

Answer 7

Jointly analyzes the economic and psychological factors that explain human behavior.

Question 8

Who are good optimizers?

Answer 8

People who are not addicted to a task or prone to procrastination. People who are experienced at a task.

Question 9

net benefit

Answer 9

benefit - cost

Question 10

optimum

Answer 10

best choice. optimal choice

Question 11

Optimization in levels steps

Answer 11

1. Convert all costs and benefits into common units.
2. Calculate the total net benefit of each alternative.
3. Pick the alternative with the highest net benefit.

Question 12

Comparative statics

Answer 12

Comparison of economic outcomes before and after some economic variable is changed.

Question 13

Marginal analysis

Answer 13

Cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative.

Question 14

Marginal cost

Answer 14

Extra cost generated from moving from one feasible alternative to the next alternative.

Question 15

Principle of Optimization at the Margin

Answer 15

An optimal feasible alternative has the property that moving to it makes you better off while moving away from it makes you worse off.

Question 16

Optimization in differences steps

Answer 16

1. Translate all costs and benefits into common units, like dollars per month.
2. Calculate the marginal consequences of moving between alternatives.
3. Apply the Principle of Optimization at the Margin by choosing the best alternative
   with the property that moving to it makes you better off and moving away from it makes you worse off.