ECON-B 251 EXAM 1 QUESTIONS WITH CORRECT ANSWERS

Revenue equation CORRECT ANSWER Price x Quantity (P*Q). Rate of change CORRECT ANSWER Price/Quantity (P/Q) - For a linear relationship, this is consistent across the equation -For a nonlinear equation, this can be extracted as the tangent of a specific point on the equation. Economics CORRECT ANSWER The study of allocation of scarce resources. Microeconomics CORRECT ANSWER Study of decision making by individuals, households, or firms (pollution, crime, health care, education). Macroeconomics CORRECT ANSWER Study of the behavior of the economy as a whole (inflation, taxes, unemployment). Rationality assumption CORRECT ANSWER Assumption that people do not intentionally make decisions that would leave them worse off. Bounded rationality CORRECT ANSWER People do not always behave rationally, due to: asymmetric information, lack of time/ability/resources, bias, emotion, uncertainty, risk. Prospect theory CORRECT ANSWER People choose to take on risk when evaluating potential losses and avoid risks when evaluating potential gains. Loss aversion CORRECT ANSWER The strong tendency to regard losses as considerably more important than gains. Self-interest CORRECT ANSWER Economists assume that people make decisions in this way, intended to make the decision-maker better off without considering others. Social interest CORRECT ANSWER Decisions made in this way are considered to be the best decision for society as a whole, taking into account efficiency and equity. Incentivizing social interest CORRECT ANSWER Governments may place punishments or subsidies in order for people to act in social interest as opposed to self-interest. Economic models CORRECT ANSWER Simplifications of reality that help the understanding of patterns and similarities across different situations, useful abstractions of reality.