CHAPTER 2 QUESTION / ANSWER

How do budget constraints impact choices?

refers to all possible combinations of goods that someone can afford, given the prices of goods and
the income (or time) we have to spend. No matter how many goods a consumer has to choose from,
every choice has an opportunity cost, i.e. the value of the other goods that aren’t chosen. The
budget constraint framework assumes that sunk costs—costs incurred in the past that can’t be
recovered— should not affect the current decision.

Calculate the opportunity costs of an action.

There is 5 steps to calculate the opportunity costs of an action :

Step 1 : Use this equation where P and Q are the price and respective quantity of any number, n, of
items purchased and Budget is the amount of income one has to spend.

Budget = P1×Q1+P2×Q2+⋯+Pn×Qn

Step 2: Apply the budget constraint equation to the scenario.

Step 3: Simplify the equation.

Step 4: Use the equation.

Step 5: Graph the results.

What is the production possibilities frontier?

It’s a diagram that shows the productively efficient combinations of two products that an economy
can produce given the resources it has available.

How can a production possibilities frontier identify productive and allocative efficiency?

For the productive efficiency it is identified by : given the available inputs and technology, it’s
impossible to produce more of one good without decreasing the quantity of another good that’s
produced.
And for the allocative efficiency it’s identified : when the mix of goods being produced represents
the mix that society most desires.
What is rationality in an economic context?

Assumption of Rationality: also called the theory of rational behavior, it is the assumption that
people will make choices in their own self-interest.
The assumption of rationality—also called the theory of rational behavior—is primarily a
simplification that economists make in order to create a useful model of human decision-making.
 What are some examples of rational decision-making?

Student decision example: A number of things may factor a student’s decision on a major, such as
what type of career a student is interested in, the reputation of specific departments at the
university a student is attending, and the student’s preferences for specific fields of study.

Businesses example: If a company stands to earn more profit by moving some jobs overseas, then
that’s the result that economists would predict.
etc…
What is the importance of marginal analysis in economics?

The importance of marginal analysis in economics lies in the examination of decisions on the margin,
meaning comparing costs of a little more or a little less.

What are some examples of marginal costs?

Marginal cost refers to the additional cost to produce each additional unit. For example, it may cost
$10 to make 10 cups of Coffee. To make another would cost $0.80. Therefore, that is the marginal
cost – the additional cost to produce one extra unit of output.
What are some examples of marginal benefits?

The marginal benefit it’s the difference (or change) in what you receive from a different choice.
For example : a consumer heads to the mall to purchase a ring .she spends $100 for the perfect ring,
and then she spots another one. Since she doesn’t need two rings, she would be unwilling to spend
another $100 on a second one. she might, however, be convinced to purchase that second ring at
$50, therefore, her marginal benefit reduces from $100 to $50 from the first to the second good.
What are the differences between positive and normative statements?

Positive Statement: are objective and conclusions are based on logic and evidence that can be
tested.
Normative Statement: involves value judgments of the speaker and the conclusions are based on
value judgments that cannot be tested.