ECON 100 - Chapter 9 & 10: Making Decisions and The Rational Consumer

  1. 1. What is an opportunity cost?

    2. What two factors do opportunity costs consist of?

    3. Give examples
    1. Opportunity cost: The real cost of something is what you give up to get it

    2. Opportunity costs consist of:

    • (i) Explicit Costs: costs that require payment (of money)
    • (ii) Implicit Costs: costs that are values foregone, but with no actual payment

    3. Explicit costs: tuition, wages, rent

    • Implicit costs: Income given up when you take time off from work
    • Time away from family when you go to university
  2. 1. In business, what are profits that only consider explicit costs, and how are they calculated?

    2. What are profits that also include the implicit costs, and how are they calculated?

    3. If you take $300,000 out of your savings to buy a restaurant, is this an explicit or implicit cost?
    1. Accounting profits: Revenues - explicit costs - depreciation

    2. Economic profits: revenues - explicit costs - depreciation - implicit costs

    3. Neither, this is an investment rather than a cost.
  3. 1. What is the formula for the additional cost of one more unit?

    2. What is the formula for the additional benefit of one more unit?
    1. MC = ΔTC / ΔQ

    2. MB = ΔTC / ΔQ
  4. 1. What is the MB from one more unit for consumers?

    2. What is the MC of one more unit for consumers?

    3. What is the MB from one more unit for producers?

    4. What is the MC of one more unit for producers?

    5. Market agents will do one more unit of an activity as long as.....
    1. The extra satisfaction that consumers get

    2. The price they have to pay (cost for consumer is benefit for supplier)

    3. The price producers get paid

    4. The extra cost of inputs to produce that unit

    5. MB ≥ MC
  5. For a consumer, if the price is constant the MC is constant, but what will happen to the MB?
    MB will decrease as Q increases. This is because the more you have, the less satisfaction you will get from having an additional unit.  ex. Going from 1 to 2 pair of socks compared to going from 50 to 51 pairs of socks.
  6. 1. The MB can be measured as the...

    2. What is consumer surplus (CS) and how is it measured?

    3. Answer the following questions

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    1. Maximum marginal willingness to pay = willingness to pay for one more unit

    2. Consumer surplus (CS) is the difference between what a consumer is willing or able to pay for a good or service, and what they acutally pay (the market price).

    3. Emma should buy 4 pairs of socks

    The optimal quantity of any activity, Q*, is where MB = MC

    At Q*, Emmas's CS will be $6 (3 + 2 + 1 + 0)
  7. 1. What is the MC and MB per chapter when studying for a course?

    2. What causes the MC to increase and the MB to decrease?

    3. How long will a student continue to study?

    4. How do you fill in this table

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    • 1. MC = time
    • MB = potential increase in marks

    2. MC per chapter will increase because the student becomes slower. With anything, people usually do the most efficient work first.

    The MB will decrease as the student remembers less and less of what they study with each chapter. 

    3. A student will continue to study as long as they feel the MB ≥ MC

    4. MC = ΔTC / ΔQ

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  8. 1. What is the MB for a producer and how is it measured?

    2. What is the MC for the producer?

    3. Why does a producer's MB generally stay the same while the MC increases?

    Give an example
    1. The MB of selling one more unit is the price paid.   MB = MR = P

    MR = ΔTR / ΔQ

    2. MC for a producer is the cost of the additional resources (inputs) used to produce one more unit of the good. 

    3. MB will stay the same as long as the price doesn't change, but MC usually increases because they become less and less productive the more they work.

    ex. A farmer will use the most fertile land first. To increase production, the farmer will have to use less productive land (shaded areas) next.
  9. 1. How do you calculate profit? 

    2. What is another word for profit?

    3. How do you calculate Marginal Net Gain?

    4. How do you fill in this table

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    1. Profit = TR - TC

    2. Profit is the same as Total Net Gain

    3. Marginal Net Gain = MR - MC

    4. STEP 1: MR = ΔTR / ΔQ

    STEP 2: MC = ΔTC / ΔQ

    STEP 3: Total Net Gain (Profit) = TR-TC

    STEP 4: Marginal Net Gain = MR - MC

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  10. Answer the following question:

    1. Emily wants to buy some oranges and her demand is given by MB = 15 - 0.5Q

    a. What would Emily be willing to pay for the 20th orange if Emily's marginal willingness to pay is her demand price?

    b. If oranges cost $1 each how many oranges would Emily buy?
    Q* is where MC = MB

    2. Sam's Sandwich Truck has costs given by MC = 1 + 0.2Q

    a. What would it cost Sam to produce a 30th sandwich?
    Sam's MC is his supply price

    b. How many sandwiches should Sam sell if he can charge $4 per sandwich?
    Q* is where MC = MR = P
    1a. MWTP = P = 15 - 0.2(20) = 15

    b. MC = $1, and since Q* is where MC = MB 

    • 1 = 15 - 0.5Q
    • 14 + 0.5Q
    • Q- = 28

    • 2a. MC = P = 1 + 0.2(30)
    • MC = $7

    b. Since Q* is where MC = MR = P...

    4 = 1 + 0.2Q

    3 = 0.2Q

    Q* = 15
  11. 1. What is a sunk cost?

    2. How should you approach sunk costs making decisions?

    3. What is the sunk cost dilemma?
    1. Costs that cannot be recovered or changed. Once it is incurred, you will never get your money back. 

    2. Since sunk costs cannot be changed, they should be excluded from current decisions. In other words, you must accept the loss and move on.

    • 3. Sunk cost dilemma: People who have already incurred sunk costs must decide whether to give up or continue.
    • * There is no right answer. It is a gamble.
  12. Sunk Costs

    You have bought a $10 nonrefundable ticket for a
    lacrosse game. You know that going to the lacrosse
    game will give you a benefit equal to $20. After you
    have bought the ticket, you hear that there will be a
    football game at the same time. Tickets to the football
    game cost $20, and you know that going to the football
    game will give you a benefit equal to $35. You tell your
    friends the following: “If I had known about the football
    game before buying the ticket to the lacrosse game, I
    would have gone to the football game instead. But now
    that I already have the ticket to the lacrosse game, it’s
    better for me to just go to the lacrosse game.” Are you
    making the correct decision?

    Justify your answer by
    calculating the marginal benefits and marginal costs of
    your decision.
    Total net benefit for lacross = 20 - 10 = $10

    Total net benefit for football = 35 - 30 = $5

    Becuase you already spent the $10 on the lacross game, it is better to go to the lacross game rather than the football game.
  13. What is utility in economics?
    A measure of well-being or happiness for the consumer.

    It can include any type of satisfaction including:

    • 1. Material pleasures
    • 2. Meeting basic needs
    • 3. Enjoyment of luxuries
    • 4. Spiritual / cultural / family activities
  14. 1. How do consumers attempt to maximize their utility?

    2. What is the equivalent of utility to producers?

    3. What is maximized consumer utility subject to? (2)
    1. By choosing a unique consumption bundle, or in other words, a collection of G & S consumed.

    2. While consumers try to maximize utility, producers try to maximize profits subject to market prices and input prices (costs).

    3. Income and market prices
  15. 1. When consumers buy more goods or services, they increase their total satisfaction. What is another word for this?

    2. What is marginal utility? What is the equation?

    3. What happens to MU as quantity consumed increases? What is this called?
    1. Total utility (TU)

    2. The additional utility derived from one more unit of a G or S.

    MU = ΔTU / ΔQ 

    • 3. Diminishing marginal utility occurs the more items are consumed. 
    • Ex. The more donuts someone eats, the less satisfaction each one brings, until finally the person gets sick.
  16. 1. What is a persons consumption bundle subject to?

    2. What is the budget line?

    3. What does the slope of the budget line measure?

    4. To get 10 more cups of coffee, how many books would you have to give up?

    What is the opportunity cost per cup of coffee? 

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    To get 2 more books, how much coffee would you have to give up?

    What is the opportunity cost per book?
    1. Budget constraint: The cost of your consumption bundle cannot exceed your income (assuming no credit cards).

    2. The budget line shows all possible consumption bundles when all of a consumer's income is spent. 

    3. The opportunity cost of the good on the horizontal axis. The inverse of the slope of the budget line measures the opportunity cost of the good on the vertical axis. 

    4. You would have to give up 2 books per cup of coffee

    The opportunity cost is 0.2 b/c

    To get 2 more books, you have to give up 10 coffee

    The opportunity cost is 5 c/b
  17. 1. What will happen to your budget line if your income increases to $300 from $200?

    2. What will happen to your budget line if your income decreases to $100 from $200?

    3. What happens to the budget line when the price of the item changes?
    1. The budget line will shift out

    2. The budget line will shift in

    3. The change in price will rotate the curve, depending on whether the price increased or decreased. There will be a new slope. 

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  18. In general, what consumption bundle are consumers going to choose?
    They will choose the optimal consumption bundle that maximizes their total utility (TU) given their income.
Author
MissionMindhack
ID
345949
Card Set
ECON 100 - Chapter 9 & 10: Making Decisions and The Rational Consumer
Description
Midterm #2 Exam Prep
Updated