ECON B251 Final Exam qestions and
answers
Scarcity Principle✔✔all actions have tradeoffs
Opportunity Cost✔✔call of the best foregone alternative action
Marginal cost-benefit principle✔✔take an action if and only if the extra benefits are at
least as great as the extra costs
Absolute advantage✔✔the ability to complete a task using less resources (time,
money, etc.)
Comparative advantage✔✔lower opportunity cost
Efficient✔✔if there is no alternative that improves outcomes for someone without
harming at least one other person
Inefficiency✔✔it is possible to make someone better off without hurting anyone else
Equity✔✔How fair an allocation rule is
Result's based equity✔✔after the allocation happens, how widely dispersed are the
resulting values?
Rule-based equity✔✔if you knew the rule, would you prefer to be any particular
participant?
Producer surplus✔✔the extra benefit producers receive from selling a good or
service, measured by the price the producer actually received minus the price the
producer would have been willing to accept
Consumer surplus✔✔the amount a buyer is willing to pay for a good minus the
amount the buyer actually pays for it
Who does the tax burden fall on?✔✔the less elastic side of the market
Utility✔✔the satisfaction people derive from consumption
Maximized utility✔✔when marginal utility is 0 or the last time marginal utility was
positive
Rational Spending Rule✔✔spending should be allocated across goods so that the
marginal utility per dollar is the same for each good
(must be spending the entire budget)
, Perfect competition✔✔market price won't change
Monopoly✔✔firm can "choose" market price (consistent with market demand)
Shutdown✔✔refers to a short-run decision not to produce anything during a specific
period of time because of current market conditions
Market exit✔✔Occurs if a business cannot make a profit and can find no way of
competing effectively
Setting a price floor✔✔require that the firm produce at least the socially optimal
quantity if they want to produce at all
Setting a price ceiling✔✔the firm will find it profitable to produce all units with
marginal cost below p
Statistical discrimination✔✔pricing at your consumer's reservation value using their
observed characteristics
Bundling method✔✔multi-tiered pricing system which allows buyers to self-select
Elements of a game✔✔- players
- strategies
- payoffs
Simultaneous-move game✔✔players have to choose without knowing anything
about what their opponents choose
Box-form✔✔of a two-player simultaneous-move game has player 1's pure strategies
on the rows, player 2's pure strategies on the columns, and payoffs in the cells
Dominant strategy equilibrium✔✔set of strategies, where each player is playing a
strategy that is always best, no matter what the other players do
Debra is majoring in biology. Upon taking an introductory chemistry course and
falling in love with it, she decides that the marginal benefit of switching to a chemistry
major is greater than the marginal cost. She decides, however, that she has put too
many credit hours into her current major to change course now. This is an example
of✔✔the sunk cost fallacy
Carol was offered three different jobs and must choose one. The firm "Rio Grande"
pays $250,000, but she must locate in Seattle, which has an income tax of 60%
(total taxes of $150,000) and amenities she values at $0. The job at "Ponzi
Incorporated" pays $100,000, is located in Delaware, which has no income tax, and
has amenities valued by Carol at $40,000. Lastly, "Blue Planet Industries" pays
$130,000 a year in Pennsylvania, with a 10% income tax (total taxes of $13,000) and
amenities valued at $30,000.
What is Carol's opportunity cost of choosing Blue Planet Industries?✔✔$140,000
answers
Scarcity Principle✔✔all actions have tradeoffs
Opportunity Cost✔✔call of the best foregone alternative action
Marginal cost-benefit principle✔✔take an action if and only if the extra benefits are at
least as great as the extra costs
Absolute advantage✔✔the ability to complete a task using less resources (time,
money, etc.)
Comparative advantage✔✔lower opportunity cost
Efficient✔✔if there is no alternative that improves outcomes for someone without
harming at least one other person
Inefficiency✔✔it is possible to make someone better off without hurting anyone else
Equity✔✔How fair an allocation rule is
Result's based equity✔✔after the allocation happens, how widely dispersed are the
resulting values?
Rule-based equity✔✔if you knew the rule, would you prefer to be any particular
participant?
Producer surplus✔✔the extra benefit producers receive from selling a good or
service, measured by the price the producer actually received minus the price the
producer would have been willing to accept
Consumer surplus✔✔the amount a buyer is willing to pay for a good minus the
amount the buyer actually pays for it
Who does the tax burden fall on?✔✔the less elastic side of the market
Utility✔✔the satisfaction people derive from consumption
Maximized utility✔✔when marginal utility is 0 or the last time marginal utility was
positive
Rational Spending Rule✔✔spending should be allocated across goods so that the
marginal utility per dollar is the same for each good
(must be spending the entire budget)
, Perfect competition✔✔market price won't change
Monopoly✔✔firm can "choose" market price (consistent with market demand)
Shutdown✔✔refers to a short-run decision not to produce anything during a specific
period of time because of current market conditions
Market exit✔✔Occurs if a business cannot make a profit and can find no way of
competing effectively
Setting a price floor✔✔require that the firm produce at least the socially optimal
quantity if they want to produce at all
Setting a price ceiling✔✔the firm will find it profitable to produce all units with
marginal cost below p
Statistical discrimination✔✔pricing at your consumer's reservation value using their
observed characteristics
Bundling method✔✔multi-tiered pricing system which allows buyers to self-select
Elements of a game✔✔- players
- strategies
- payoffs
Simultaneous-move game✔✔players have to choose without knowing anything
about what their opponents choose
Box-form✔✔of a two-player simultaneous-move game has player 1's pure strategies
on the rows, player 2's pure strategies on the columns, and payoffs in the cells
Dominant strategy equilibrium✔✔set of strategies, where each player is playing a
strategy that is always best, no matter what the other players do
Debra is majoring in biology. Upon taking an introductory chemistry course and
falling in love with it, she decides that the marginal benefit of switching to a chemistry
major is greater than the marginal cost. She decides, however, that she has put too
many credit hours into her current major to change course now. This is an example
of✔✔the sunk cost fallacy
Carol was offered three different jobs and must choose one. The firm "Rio Grande"
pays $250,000, but she must locate in Seattle, which has an income tax of 60%
(total taxes of $150,000) and amenities she values at $0. The job at "Ponzi
Incorporated" pays $100,000, is located in Delaware, which has no income tax, and
has amenities valued by Carol at $40,000. Lastly, "Blue Planet Industries" pays
$130,000 a year in Pennsylvania, with a 10% income tax (total taxes of $13,000) and
amenities valued at $30,000.
What is Carol's opportunity cost of choosing Blue Planet Industries?✔✔$140,000
