Chapter 1

Question 1

Economics is

Answer 1

the study of how efficient decisions are made.

Question 2

Efficient decisions involve

Answer 2

choosing the best alternative.

Question 3

The theory of revealed preference

Answer 3

is the principle that choices reveal our values.

Question 4

The three characteristics of value are

Answer 4

1. Value depends on the situation. 2. Value is different for different people. 3. Subsequent units of the same good have less value.

Question 5

The idea that we choose the best, then the second best, etc

Answer 5

is the Principle of Optimal arrangement

Question 6

Why do subsequent units of something have less value?

Answer 6

The POA and the Pizza effect.

Question 7

How do Economists find the value of clean air?

Answer 7

By studying prices of similar houses in neighborhoods with varying pollution.

Question 8

How do economists find the value of an individual’s life?

Answer 8

By finding how much a worker will accept to take a more dangerous job.

Question 9

What is value for an individual?

Answer 9

Maximum willingness to pay, or, if the individual owns it, it is the least the individual is willing to accept for that thing.

Question 10

How do economists find the value of a potential child?

Answer 10

By looking at how much time and money must be sacrificed by the parents to have a child.

Question 11

Most people would say there are some things beyond price,

Answer 11

but Economists think, with certainty, that nothing is beyond price.

Question 12

The only reason we value dollars is because

Answer 12

of the stuff we exchange them for (goods and services).

Question 13

Cost

Answer 13

is the value of the best alternative sacrificed when decisions are made.

Question 14

The no free lunch principle means that

Answer 14

any decision has at least two alternatives and, since you are making a decision, cost exists.

Question 15

Macroeconomics is

Answer 15

the study of total economies.

Question 16

Scarcity is

Answer 16

having more desires than can be satisfied.

Question 17

The marginal value of something is

Answer 17

the value of the individual units of that thing.

Question 18

How are decisions made using marginal analysis?

Answer 18

Take action if marginal value is at least as great as marginal cost.

Question 19

If a good is consumed at zero cost, how man units will be consumed?

Answer 19

Until marginal value equals zero.

Question 20

Why does marginal cost rise as more is consumed?

Answer 20

POA; When the consumer purchases something, they sacrifice the least valuable alternative first, then the second, etc.

Question 21

The law of diminishing returns states

Answer 21

that as you add more workers in a production facility, they eventually become less productive because everyone can’t take part in the production process.

Question 22

Are jobs benefits or costs to society?

Answer 22

Both. Labor has costs (wages) and gives benefits.

Question 23

As production increases,

Answer 23

marginal cost rises.

Question 24

Demand is

Answer 24

the relationship between price and units desired for purchase, other things equal.

Question 25

The demand curve is

Answer 25

the same as the marginal value curve.

Question 26

Supply is

Answer 26

the relationship between the price of something and the quantities that firms are willing to sell.

Question 27

At high prices

Answer 27

produces are willing to supply, but consumers are less willing to buy.

Question 28

At the equilibrium price,

Answer 28

consumers can buy all that they want, and producers can supply all that they want.

Question 29

Social gain

Answer 29

equals total value minus total cost.

Question 30

Consumer gain

Answer 30

equals total value minus price paid.

Question 31

Producer's gain

Answer 31

equals total amount paid minus total cost.

Question 32

As long as prices are free to adjust

Answer 32

shortages and surpluses are eliminated.

Question 33

When supply falls, what effects do we see in the market?

Answer 33

Higher prices.