Opportunity Cost correct answers Cost of the next best alternative use of money, time, or resources when one choice is made rather than another.
e.g. A friend will 1. clean the house ($20) or 2. cook dinner ($15) or 3. Laundry ($10). The opportunity cost of having dinner cooked is $20. If you ch...
Econ 130 || with Error-free Solutions.
Opportunity Cost correct answers Cost of the next best alternative use of money, time, or
resources when one choice is made rather than another.
e.g. A friend will 1. clean the house ($20) or 2. cook dinner ($15) or 3. Laundry ($10). The
opportunity cost of having dinner cooked is $20. If you chose to clean the house, OP is $15 (next
best alternative.
Accommodation is not an OP because you have to pay for it whether you go to Uni or work.
Sunk Costs correct answers Costs that cannot be avoided because they have already been
incurred. e.g. At University or Working, there are still living costs such as food.
Essential elements of the basic competitive model correct answers Profit Maximising Firms -
only caring about the bottom line
Rational Customers - only buy things they want or get satisfaction from. If the benefit outweighs
the cost they will buy.
Competitive Markets - many firms, selling identical products to many consumers
Perfectly competitive markets have:
Price Takers- firms and customers not big enough to dominate a market
free entry/exit
participants who have perfect information
What is the intercept and what is the slope coefficient in:
Y=-3+2X correct answers Intercept = -3 (when X=0)
Slope coefficient = 2
Marginal Utility correct answers The amount that utility increases with an increase of one unit of
an economic good or service (satisfaction)
Normal Goods correct answers Goods for which demand goes up when income is higher and for
which demand goes down when income is lower.
Inferior Goods correct answers Goods for which demand tends to fall when income rises.
These exist when there are cheap and expensive alternative e.g. steak v. mince - one is better
(depending on preferences.
You don't tend to buy more when income rises, you only switch. If a good is inferior, it is normal
for a lower income.
Giffen Goods correct answers Very inferior goods. As price rises, demand rises since consumers
cannot afford any other products so spend what money they have on these. e.g. Rice/ potatoes
, Income Effect correct answers Indicates that a lower price increases the purchasing power of a
buyer's money income e.g. income goes down, inferior goods (noodles) go up, normal goods
(chicken) goes down. - positive relationship
When income goes up, quantity goes up for a normal good and down for an inferior good. -
negative relationship
BUT - reversed if referring to the price of a good.
if the price foes up, quantity goes down - for a normal good
If the price goes up, Quantity goes up for an inferior good - positive.
Substitution Effect correct answers if 2 products satisfy the same need, and the price increases,
then they will choose the other e.g. apples go up, consumption goes down but bananas go up.
Plane tickets become cheaper so you will substitute away from other goods to spend money on
the tickets.
If a price of a good goes up, you consume less.
opportunity cost of the good falls so we buy more.
Diminishing Marginal Utility correct answers the principle that our additional satisfaction, or our
marginal utility, tends to go down as more and more units are consumed.
Perfect complements v. Perfect Substitutes correct answers Perfect complements: left and right
shoes - you are better off with 1 or 2 of each but no better off with 1 left and 2 rights.
Perfect Substitutes: 2 pens are better than 1 it does not matter what colour they are, it is the
quantity that matters.
Utility Maximising Choice correct answers MuX/Px=MuY/Py = getting 1 for 1 (bang for buck)
The cost of Labour v. Leisure correct answers Opportunity Cost - 1 hour of work ($15) is what 1
hour of leisure costs.
SE and IE of a wage rise correct answers SE - higher wages, work more
IE - higher wages , more money, work less and leisure more (assuming work is a normal good).
Saving determinants correct answers Income (from which people save)
Interest rate
Time preference
Profit = correct answers Total Revenue - Total Costs
TR = price x quantity
Fixed Cost correct answers Costs that do not vary with the quantity of output produced e.g. the
factory
Marginal Cost (MC) correct answers Extra cost of producing one additional unit of production.
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