ECON 301 Final Exam Questions With
Verified Answers
Two steps of problem solving - ANSWER 1) Figure out why people are making
mistakes, then
2) Figure out how to prevent future ones
Rational-Actor Paradigm - ANSWER A model of behavior that which assumes
that people act rationally, optimally, and self-interestedly, that is, they respond
to incentives
Two pieces of incentives: - ANSWER 1) A way of measuring performance
2) A compensation scheme to reward good (or punish bad) performance
A well-designed organization is one in which: - ANSWER Employee incentives
are aligned with organizational goals
What does it mean to say that employee incentives are aligned with
organizational goals? - ANSWER 1) Employees have enough information to make
good decisions
2) Employees have the incentive to make good decisions
How can you analyze any problem? - ANSWER 1) Ask who made the bad
decision
2) Ask if the decision maker had enough information to make a good decision
3) Ask if the decision maker had the incentive to make a good decision
Solutions to decision-based problems: - ANSWER 1) Let someone else with
better information or incentives make the decision
2) Give the decision-maker more information
3) Change the decision maker's incentives
How do voluntary transaction create wealth? - ANSWER By moving assets from
lower to higher-valued uses
What destroys wealth? - ANSWER Anything that impedes the movement of
assets to higher-valued uses, like taxes, subsidies, or price controls
What does efficiency mean? - ANSWER Each asset is employed in its highest-
valued use
, What does an inefficiency imply? - ANSWER A money-making opportunity
What does the art of business consist of? - ANSWER Finding an asset in lower-
valued use and devising ways to profitably move it to a higher-valued one
What can a company be thought of as? - ANSWER A series of transactions
Who does a well-designed organization reward? - ANSWER Employees who
identify and consummate profitable transactions or who stop unprofitable ones
What are costs associated with? - ANSWER Decisions
Opportunity cost of an alternative - ANSWER The profit you give up to pursue it
Relevant costs and relevant benefits of a decision - ANSWER All costs and
benefits that vary with the consequences of a decision and only costs and
benefits that vary with the consequences of a decision
Fixed Costs - ANSWER Do not vary with the amount of output
Variable Costs - ANSWER Change as output changes; decisions that change
output change these costs only
Does accounting profit correspond with economic profit? - ANSWER Not
necessarily
Sunk-Cost Fallacy (Fixed-Cost Fallacy) - ANSWER Considering irrelevant costs;
common one is letting overhead or depreciation costs influence short-run
decisions
Hidden-Cost Fallacy - ANSWER Occurs when you ignore relevant costs;
common one is ignoring the opportunity cost of capital when making investment
or shutdown decisions
You will get confused if you begin by looking at the - ANSWER Costs
You will never get confused if you begin with - ANSWER The decision you are
considering
AC - ANSWER Average Costs
Average Costs - ANSWER Total cost (fixed and variable) divided by total units
produced; fixed cost portion is irrelevant to an extent decision
MC - ANSWER Marginal Cost
Verified Answers
Two steps of problem solving - ANSWER 1) Figure out why people are making
mistakes, then
2) Figure out how to prevent future ones
Rational-Actor Paradigm - ANSWER A model of behavior that which assumes
that people act rationally, optimally, and self-interestedly, that is, they respond
to incentives
Two pieces of incentives: - ANSWER 1) A way of measuring performance
2) A compensation scheme to reward good (or punish bad) performance
A well-designed organization is one in which: - ANSWER Employee incentives
are aligned with organizational goals
What does it mean to say that employee incentives are aligned with
organizational goals? - ANSWER 1) Employees have enough information to make
good decisions
2) Employees have the incentive to make good decisions
How can you analyze any problem? - ANSWER 1) Ask who made the bad
decision
2) Ask if the decision maker had enough information to make a good decision
3) Ask if the decision maker had the incentive to make a good decision
Solutions to decision-based problems: - ANSWER 1) Let someone else with
better information or incentives make the decision
2) Give the decision-maker more information
3) Change the decision maker's incentives
How do voluntary transaction create wealth? - ANSWER By moving assets from
lower to higher-valued uses
What destroys wealth? - ANSWER Anything that impedes the movement of
assets to higher-valued uses, like taxes, subsidies, or price controls
What does efficiency mean? - ANSWER Each asset is employed in its highest-
valued use
, What does an inefficiency imply? - ANSWER A money-making opportunity
What does the art of business consist of? - ANSWER Finding an asset in lower-
valued use and devising ways to profitably move it to a higher-valued one
What can a company be thought of as? - ANSWER A series of transactions
Who does a well-designed organization reward? - ANSWER Employees who
identify and consummate profitable transactions or who stop unprofitable ones
What are costs associated with? - ANSWER Decisions
Opportunity cost of an alternative - ANSWER The profit you give up to pursue it
Relevant costs and relevant benefits of a decision - ANSWER All costs and
benefits that vary with the consequences of a decision and only costs and
benefits that vary with the consequences of a decision
Fixed Costs - ANSWER Do not vary with the amount of output
Variable Costs - ANSWER Change as output changes; decisions that change
output change these costs only
Does accounting profit correspond with economic profit? - ANSWER Not
necessarily
Sunk-Cost Fallacy (Fixed-Cost Fallacy) - ANSWER Considering irrelevant costs;
common one is letting overhead or depreciation costs influence short-run
decisions
Hidden-Cost Fallacy - ANSWER Occurs when you ignore relevant costs;
common one is ignoring the opportunity cost of capital when making investment
or shutdown decisions
You will get confused if you begin by looking at the - ANSWER Costs
You will never get confused if you begin with - ANSWER The decision you are
considering
AC - ANSWER Average Costs
Average Costs - ANSWER Total cost (fixed and variable) divided by total units
produced; fixed cost portion is irrelevant to an extent decision
MC - ANSWER Marginal Cost
