ECON B-251 questions and answers
What is economics? ✔✔the study of choices... the study of how people make decisions
with limited resources
What is scarcity? ✔✔when limited quantities of resources meet unlimited wants.
what is microeconomics? ✔✔the study of decision making undertaken by individuals
(or households) and by firms
What is macroeconomics? ✔✔the study of the behavior of the economy as a whole
what is the rationality assumption? ✔✔The assumption that people do not intentionally
make decisions that would leave them worse off.
Why wouldn't people behave rationally? ✔✔1) lack of time/cognitive ability 2)
asymmetric information 3) bounded rationality 4) cognitive biases
What is asymmetric information? ✔✔A situation where on party often does not know
enough about the other party to make accurate decisions. ex) being sold a faulty phone
what is bounded rationality? ✔✔not making rational decisions because you do not
have all of the information
Who is a maximizer? ✔✔one who makes optimal decisions based on rationality
assumption
Who is a satisficer? ✔✔try to find a "good enough" solution based on "bounded
rationality"
What is self-interest? ✔✔an individual's own personal gain... based on rationality
assumption
What is social-interest? ✔✔the choices that are best for society as a whole
What is price elasticity of demand? ✔✔measures how much demand for quantity
changes as a result to a change in price
What is the law of demand? ✔✔there is an inverse relationship between price and
quantity demanded; as the price goes up, demand goes down
, What is the mid-point formula of price elasticity of demand? ✔✔percentage change in
quantity divided by the percentage change in price
Define Elastic ✔✔the quantity demanded is sensitive to the change in price; change is
greater than 1
Define Inelastic ✔✔the quantity demanded is insensitive to the change in price; change
is less than one but above 0
Define Unit Elastic ✔✔the quantiy demanded is equally sensitive to the change in
price; change is equal to 1
If a price increases and the good is elastic, what will happen to the total revenue? ✔✔it
will decrease (inverse relationship)
If a price increases and the good is unit elastic, what will happen to the total revenue?
✔✔it will remain the same
If a price increases and the good is inelastic, what will happen to the total revenue? ✔
✔it will increase (direct positive relationship)
What is cross-price elasticity of demand? ✔✔a measure of how much the quantity
demanded of one good responds to a change in the price of another good
3 determinants of elasticity of demand ✔✔-Availability of substitutes
-Price relative to income
-Time (to seek alternatives)
If goods x and y are substitute goods, when the price of good x is increased, what will
occur to the demand of good y? ✔✔the demand for good y will increase
If goods x and y are complementary goods, when the price of good x is increased, what
will occur to the demand of good y? ✔✔the demand of good y will decrease
What is income elasticity of demand? ✔✔The responsiveness of demand to a change
in income
what are inferior goods? ✔✔goods for which the demand falls when income rises. ex)
cheap clothes
what are luxury goods? ✔✔luxury goods are goods where an increase in income will
increase the demand for the good. ex) designer clothes
What is economics? ✔✔the study of choices... the study of how people make decisions
with limited resources
What is scarcity? ✔✔when limited quantities of resources meet unlimited wants.
what is microeconomics? ✔✔the study of decision making undertaken by individuals
(or households) and by firms
What is macroeconomics? ✔✔the study of the behavior of the economy as a whole
what is the rationality assumption? ✔✔The assumption that people do not intentionally
make decisions that would leave them worse off.
Why wouldn't people behave rationally? ✔✔1) lack of time/cognitive ability 2)
asymmetric information 3) bounded rationality 4) cognitive biases
What is asymmetric information? ✔✔A situation where on party often does not know
enough about the other party to make accurate decisions. ex) being sold a faulty phone
what is bounded rationality? ✔✔not making rational decisions because you do not
have all of the information
Who is a maximizer? ✔✔one who makes optimal decisions based on rationality
assumption
Who is a satisficer? ✔✔try to find a "good enough" solution based on "bounded
rationality"
What is self-interest? ✔✔an individual's own personal gain... based on rationality
assumption
What is social-interest? ✔✔the choices that are best for society as a whole
What is price elasticity of demand? ✔✔measures how much demand for quantity
changes as a result to a change in price
What is the law of demand? ✔✔there is an inverse relationship between price and
quantity demanded; as the price goes up, demand goes down
, What is the mid-point formula of price elasticity of demand? ✔✔percentage change in
quantity divided by the percentage change in price
Define Elastic ✔✔the quantity demanded is sensitive to the change in price; change is
greater than 1
Define Inelastic ✔✔the quantity demanded is insensitive to the change in price; change
is less than one but above 0
Define Unit Elastic ✔✔the quantiy demanded is equally sensitive to the change in
price; change is equal to 1
If a price increases and the good is elastic, what will happen to the total revenue? ✔✔it
will decrease (inverse relationship)
If a price increases and the good is unit elastic, what will happen to the total revenue?
✔✔it will remain the same
If a price increases and the good is inelastic, what will happen to the total revenue? ✔
✔it will increase (direct positive relationship)
What is cross-price elasticity of demand? ✔✔a measure of how much the quantity
demanded of one good responds to a change in the price of another good
3 determinants of elasticity of demand ✔✔-Availability of substitutes
-Price relative to income
-Time (to seek alternatives)
If goods x and y are substitute goods, when the price of good x is increased, what will
occur to the demand of good y? ✔✔the demand for good y will increase
If goods x and y are complementary goods, when the price of good x is increased, what
will occur to the demand of good y? ✔✔the demand of good y will decrease
What is income elasticity of demand? ✔✔The responsiveness of demand to a change
in income
what are inferior goods? ✔✔goods for which the demand falls when income rises. ex)
cheap clothes
what are luxury goods? ✔✔luxury goods are goods where an increase in income will
increase the demand for the good. ex) designer clothes
