Taylor's Principles

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Why Study Economics

1. Define the term economics.

Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Difficulty: EType: D

2. List four reasons to study economics.

(1.)Learn a way of thinking.
(2.)Understand society.
(3.)Understand global affairs.
4. Be an informed voter.

Difficulty: EType: F

3. Explain what is meant by the term opportunity cost.

The opportunity cost of something is measured by the next best alternative that we forgo, or give up, when we make a choice or a decision.

Difficulty: EType: D

4. Why would an economist argue that tuition is not the largest cost of attending a state university?

The largest cost of attending a university is the opportunity cost of the student's time. This could be measured by the foregone income that could have been earned if the student worked instead of attending classes.

Difficulty: EType: C

Situation #1 Assume that you have hired three executives to run your company each with a different job. All are equally productive and each can do the other person’s job if necessary. Assume that the first executive’s contribution to the company is worth $1,000,000; the second one is worth $800,000 and the third one is worth $500,000.

5. Referring to Situation #1 suppose that for the time being you can only afford to hire the first executive. What is the opportunity cost of the first executive’s work from the viewpoint of the company? Explain.

The opportunity cost of the first executive is $800,000. That is the value of the next best available alternative which is currently forgone.

Difficulty: EType: C

6. Referring to Situation #1 suppose that you can now hire two workers. What is the opportunity cost of the second executive’s work from the viewpoint of the company? Explain.

The second executive’s work is simply the value of the next best opportunity which is the work that could have been done by the third executive which is $500,000

Difficulty: EType: C

7. Referring to Situation #1 suppose that you decide that you have to fire the first and the third executive without hiring any replacements. What would be the opportunity cost of the second executive’s work? Explain why your answer is not the same as in the question above.

The opportunity cost of second executive’s work is $800,000. The reason is that since each executive can perform any work that they other can then it makes sense to change the second executive’s job so that he is now doing the most highly valued work – that with the $1,000,000 value. That leaves the $800,000 job undone which means that becomes the opportunity cost of the second executive’s work.

Difficulty: DType: C
8. Explain why it is more likely that the opportunity cost of attending a 7:00 a.m. class is forgone sleep but that this is not reasonably likely to be the case for a class that meets at 12:00 noon.

At 7:00 a.m. there might not be too many other opportunity costs for your time. Forgone sleep might reasonably be an opportunity cost of your time. However, at 12:00 noon while it is possible that forgone sleep is your opportunity cost it is not likely since there are probably other things of higher value that you have given up by then unless you are a very later sleeper.

Difficulty: EType: C

9. If a good is scarce, does that imply that there is a shortage of it?

No. If a good is scarce, that means that it is limited in supply. All resources in the economy are scarce.

Difficulty: EType: C

10. What are sunk costs?

Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred and cannot be refunded....
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