Microeconomics and Behavior C1 Quiz

Microeconomics entails the study of how people choose under [blank_start]conditions of scarcity[blank_end].

Economists answer questions of choice by comparing the [blank_start]costs[blank_end] and [blank_start]benefits[blank_end] of doing the activity in question.

We define B(x) as the [blank_start]maximum[blank_end] dollar amount [blank_start]you would be willing to pay to do x.[blank_end]

C(x) is the value of all the resources you must [blank_start]give up[blank_end] in order to do x.

The [blank_start]reservation price[blank_end] of activity x is the price at which a person would be indifferent between doing x and not doing x.

If B(x) and C(x) happened to be equal, you would be [blank_start]indifferent[blank_end] between the two alternatives.

Economists believe that useful insights into our behavior can be gained by assuming that we act as if governed by the rules of [blank_start]rational decision making[blank_end].

The opportunity cost of x is the [blank_start]value[blank_end] of all that must be [blank_start]sacrificed[blank_end] to do x.

Not incurring a cost is the same as getting [blank_start]a benefit[blank_end].

[blank_start]Sunk costs[blank_end] are costs that are beyond recovery at the moment a decision is made.

Sunk costs should always be [blank_start]ignored[blank_end] in decision making.

In the all you can eat pizza experiment, it was the group who did not receive the refund that [blank_start]ate more[blank_end]. This should not have been the case as they should have stopped eating when B(x), x being another slice of pizza, was [blank_start]zero[blank_end]. This was the case with the group that [blank_start]did receive the refund[blank_end].

If you save $10 dollars on a $20 dollar radio with a 15 minute drive, the value of travelling 15 minutes to save $10 on a $1000 dollar tv would be [blank_start]equal[blank_end].

When using the cost-benefit test, you should express costs and benefits in [blank_start]absolute[blank_end] dollar terms. Comparing [blank_start]percentages[blank_end] is not a fruitful way to think about decisions like these.

To answer the question of “Should I increase the level by which I am currently engaging in activity x?”, we must compare the [blank_start]benefit[blank_end] and [blank_start]cost[blank_end] of an [blank_start]additional unit[blank_end] of activity.

The cost of an additional unit of activity is called the [blank_start]marginal cost[blank_end] of the activity, and the benefit of an additional unit is called its [blank_start]marginal benefit[blank_end].

The optimal amount of activity is the quantity for which the [blank_start]marginal benefit[blank_end] of conversation is just [blank_start]equal[blank_end] to its [blank_start]marginal cost[blank_end].

The downward slope of a marginal benefit curve reflects the fact that the value of an [blank_start]additional unit[blank_end] declines with the total amount of activity that has occurred thus far.

The four most common pitfalls in cost-benefit analysis are: failing to include [blank_start]opportunity[blank_end] costs; failing to ignore [blank_start]sunk costs[blank_end]; measuring costs and benefits as [blank_start]proportions[blank_end] rather than [blank_start]absolute[blank_end] values; and failing to recognise the difference between [blank_start]average[blank_end] and [blank_start]marginal[blank_end] cost and benefits.

A [blank_start]normative question[blank_end] is a question about what policies or institutional arrangements lead to the best outcomes.

A positive question is a question about the [blank_start]consequences[blank_end] of [blank_start]specific[blank_end] policies or institutional arrangements.