Module 4 Flashcards
(18 cards)
According to “Thinking Like an Economist,” the Homo Economicus is:
only concerned with personal material cost and benefits
Which of the following describes the decision-maker classifications for individuals under utility theory?
Risk-averse, risk-seeking and risk-neutral
According to “Thinking Like an Economist”, when does the invisible hand mechanism break down?
When costs of benefits accrue to people other than the decision-maker
According to “Thinking Like An Economist”, what is the difference between a normative and a positive question?
Normative questions ask about what policies or institutional arrangements lead to the best outcomes. Positive questions ask what the consequences of specific policies are.
Expected Utility is calculated by:
Probability of the outcome multiplied by the utility of the resulting wealth
All the following statements about the Utility Function are true except:
the Utility Function reflects objective attitudes about risk
According to “Thinking Like an Economist”, which of the following is NOT a common pitfall of decision-making?
All of these are common pitfalls in decision making
- Failing to ignore sunk costs.
- Measuring costs and benefits as proportions.
- Failing to understand the average-marginal distinction.
According to “Thinking Like An Economist”, opportunity cost is best defined as
the value of all that must be sacrificed in order to benefit
The optimal outcome of a continuously variable activity occurs when:
Marginal cost = Marginal benefit
According to “Thinking Like an Economist”, economic risk analysis is on firmer ground when it comes to answering what type of question and why?
Positive questions; economic analysis questions what the consequences of specific policies or institutional arrangements will be
According to “Thinking Like an Economist”, economists increasingly believe that the key to progress in macroeconomics lies in
more careful analysis of the individual markets that make up broader aggregates
The Utility Index proposed by Von Neumann and Morgenstern:
I. is designed for predictive purposes
II. enables decision making based on preferences
III. measures utility in situations where risk exists
I, II, III
The claim that decisions are made to maximize expected utility rather than expected monetary value is the major component of which of the following?
Utility theory
According to “Thinking Like an Economist,” this economist supported to concept that assuming rules of rational decision making always apply can give insight into human behavior.
Milton Friedman
The Florida Lottery has done extensive research on the individuals who purchase their products. They have determined that their customers have a square root utility function and an initial wealth of $100. It costs $19 to purchase a lottery ticket and each ticket has a 50/50 chance of being worth $39. True or False, customers will purchase these lottery tickets.
False
(sqt of 100= 10)
(.5sqrt(120)+ .5sqrt(81)= 9.977
An investor owns a hostel business and has $10,000 left over after the year (initial wealth = 10,000). He has the choice of not investing the money or purchasing additional property for his hostel. There is a 50% probability he will make $5,000 and a 50% probability he will lose $3,000 if he chooses to invest in the new property. Assuming he has a square root utility function, what should he do?
Invest the money
generates more “utils” 103.07 vs. 100 for not investing.
A girl is given $15 by her parents. She has two options of how to spend the money. She can either save the money for future purchases or she can start a lemonade stand on her driveway. If she spends her $15 on the lemonade stand, there is a 50% probability she will lose $10 and a 50% probability she will make $12. Assuming the girl has a square root utility function, what should the girl do with the money?
Save her money
the utils from the $15 is 3.87, the utils from the lemonade stand is 3.71.
The owner of a private language school has a profit of $50,000 for the year. She has the option of saving the $50,000 for future opportunities or investing in a new classroom facility. The investment has a 50% probability of making $20,000 and a 50% probability of losing 35,000. If she has a square root utility function, what should the school do?
Save for future opportunities
the utils from saving (223.60) are greater than the utils from the investment (193.5
