ECON 301 FINAL QUESTIONS WITH VERIFIED
ANSWERS
Two steps of problem solving - Answers - 1) Figure out why people are making
mistakes, then
2) Figure out how to prevent future ones
Rational-Actor Paradigm - Answers - 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: - Answers - 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: - Answers - Employee incentives are
aligned with organizational goals
What does it mean to say that employee incentives are aligned with organizational
goals? - Answers - 1) Employees have enough information to make good decisions
2) Employees have the incentive to make good decisions
How can you analyze any problem? - Answers - 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: - Answers - 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? - Answers - By moving assets from lower
to higher-valued uses
What destroys wealth? - Answers - Anything that impedes the movement of assets to
higher-valued uses, like taxes, subsidies, or price controls
What does efficiency mean? - Answers - Each asset is employed in its highest-valued
use
What does an inefficiency imply? - Answers - A money-making opportunity
What does the art of business consist of? - Answers - 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? - Answers - A series of transactions
Who does a well-designed organization reward? - Answers - Employees who identify
and consummate profitable transactions or who stop unprofitable ones
What are costs associated with? - Answers - Decisions
Opportunity cost of an alternative - Answers - The profit you give up to pursue it
Relevant costs and relevant benefits of a decision - Answers - 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 - Answers - Do not vary with the amount of output
Variable Costs - Answers - Change as output changes; decisions that change output
change these costs only
Does accounting profit correspond with economic profit? - Answers - Not necessarily
Sunk-Cost Fallacy (Fixed-Cost Fallacy) - Answers - Considering irrelevant costs;
common one is letting overhead or depreciation costs influence short-run decisions
Hidden-Cost Fallacy - Answers - 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 - Answers - Costs
You will never get confused if you begin with - Answers - The decision you are
considering
AC - Answers - Average Costs
Average Costs - Answers - Total cost (fixed and variable) divided by total units
produced; fixed cost portion is irrelevant to an extent decision
MC - Answers - Marginal Cost
Marginal Cost - Answers - The additional cost incurred by producing and selling one
more unit
MR - Answers - Marginal revenue
Marginal Revenue - Answers - The additional revenue gained from selling one more unit
ANSWERS
Two steps of problem solving - Answers - 1) Figure out why people are making
mistakes, then
2) Figure out how to prevent future ones
Rational-Actor Paradigm - Answers - 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: - Answers - 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: - Answers - Employee incentives are
aligned with organizational goals
What does it mean to say that employee incentives are aligned with organizational
goals? - Answers - 1) Employees have enough information to make good decisions
2) Employees have the incentive to make good decisions
How can you analyze any problem? - Answers - 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: - Answers - 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? - Answers - By moving assets from lower
to higher-valued uses
What destroys wealth? - Answers - Anything that impedes the movement of assets to
higher-valued uses, like taxes, subsidies, or price controls
What does efficiency mean? - Answers - Each asset is employed in its highest-valued
use
What does an inefficiency imply? - Answers - A money-making opportunity
What does the art of business consist of? - Answers - 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? - Answers - A series of transactions
Who does a well-designed organization reward? - Answers - Employees who identify
and consummate profitable transactions or who stop unprofitable ones
What are costs associated with? - Answers - Decisions
Opportunity cost of an alternative - Answers - The profit you give up to pursue it
Relevant costs and relevant benefits of a decision - Answers - 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 - Answers - Do not vary with the amount of output
Variable Costs - Answers - Change as output changes; decisions that change output
change these costs only
Does accounting profit correspond with economic profit? - Answers - Not necessarily
Sunk-Cost Fallacy (Fixed-Cost Fallacy) - Answers - Considering irrelevant costs;
common one is letting overhead or depreciation costs influence short-run decisions
Hidden-Cost Fallacy - Answers - 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 - Answers - Costs
You will never get confused if you begin with - Answers - The decision you are
considering
AC - Answers - Average Costs
Average Costs - Answers - Total cost (fixed and variable) divided by total units
produced; fixed cost portion is irrelevant to an extent decision
MC - Answers - Marginal Cost
Marginal Cost - Answers - The additional cost incurred by producing and selling one
more unit
MR - Answers - Marginal revenue
Marginal Revenue - Answers - The additional revenue gained from selling one more unit
