Week 2 Quiz Answer Key Questions from Unit I: Sections 4-8 1. According to the textbook, when people make decisions on the margin: 1. they make a small decision at a time. 2. they consider expected costs and benefits. 3. they make a new decision based on a new situation. 4. All of the above. 5. None of the above. 2. According to the textbook, how should we treat sunk costs when making decisions on the margin? 1. We should take them into account as any other costs. 2. We should take them into account but double their value. 3. We should ignore them. 4. All of the above. 5. None of the above. 3. According to your textbook, what does it mean to be rational? 1. You make decisions randomly. 2. You make decisions in a consistent manner. 3. You always make good decisions. 4. All of the above. 5. None of the above. 4. According to your textbook, which of the following is a sunk cost? 1. A non-refundable deposit paid on an apartment rental. 2. Time spent studying for a class that you are now considering dropping. 3. The fee for a hotel reservation on Expedia that is charged regardless of whether or not you end up staying at the hotel. 4. All of the above. 5. None of the above. 5. According to your textbook, what does it mean to make decisions on the margin? 1. In a cost benefit analysis, you always compare benefits to costs. 2. In a cost benefit analysis, you always use expected costs and benefits. 3. In a cost benefit analysis, you only consider costs that are non-refundable. 4. All of the above. 5. None of the above.6. In order to build a model of how people make decisions, we need to make some important simplifying assumptions. Which one of the following assumptions do economists often make? 1. People are rational. 2. A person’s rational decision-making goal is to make him or herself as happy as possible. 3. People attempt to maximize their economic surplus. 4. People make decisions in a consistent manner. 5. All of the above. 7. A pro-con list is a useful decision-making tool, but it also has shortcomings. Which one of the following is a shortcoming of a pro-con list as compared to a cost benefit analysis? 1. A pro-con list is unable to include items unless they have an actual dollar value. 2. A pro-con list is unable to include externalities while a cost benefit analysis must include externalities. 3. A pro-con list can only be used before a decision is made while a cost-benefit analysis can be performed only after a decision is made. 4. It is more difficult to compare the size of the pros and cons than to compare the size of the costs and benefits because pros and cons do not use a compare unit of measurement. 5. All of the above. 8. Which of the following best defines an opportunity cost? 1. An opportunity cost is a cost that you cannot avoid incurring, regardless of what decision you choose to make. 2. An opportunity cost measures the additional benefit you get when you purchase an additional unit of a product. 3. An opportunity cost is the value of the next best alternative given up when you make a decision. 4. An opportunity cost is any cost already incurred prior to making a decision. 5. All of the above provide equally good definitions of an opportunity cost. 9. Which of the following statements is true with respect to a pro-con list? 1. Two people making the same decision (for example, should I attend college) can make different decisions based on the items each includes in his or her pro-con list. 2. The items included in a pro-con list are based on an individual’s expectations of the pros and the cons of the decision. These expectations may be wrong. 3. Other parties (parents, school officials, friends, government, etc.) may be able to get you to change your decision by offering you incentives or disincentives. 4. A pro-con list is inferior to a cost benefit analysis because it lacks a common unit of measurement; it is more difficult to decide whether pros are bigger than cons than to decide if benefits are bigger than costs. 5. All of the above.10. The term "economic surplus" can also mean 1. Happiness. 2. Benefit. 3. Welfare. 4. All of the above. 5. None of the above. 11. The assumption economists make that people are "rational" means that 1. Their decisions are always right. 2. They make decisions in a consistent manner. 3. Their decisions always turn out the way they expect them to. 4. All of the above. 5. None of the above. 12. As the word is being used in this course, what does it mean when we say that a person is making a rational decision? 1. The decision is not based on emotion; it is based purely on reason. 2. The decision is made while the thought process is unhindered by drugs or alcohol. 3. You believe the decision will have benefits but no costs to you. 4. You believe the decision will maximize your overall happiness. 5. All of the above are necessary for your decision to be rational. 13. If an individual uses cost benefit analysis to make a decision, which of the following must be true? 1. The outcome must be based on that person’s expectations of costs and benefits. 2. The decision must include any external costs or benefits. 3. The decision must turn out to be a good decision. 4. All of the above. 5. None of the above. 14. By assuming that people are rational we mean that: 1. They make their decisions in a consistent manner. 2. They always try to make good decisions. 3. They always try to make themselves as happy as possible. 4. People donate to charity because they feel they benefit from charitable donations. 5. All of the above.15. When performing a cost benefit analysis: 1. Two rational people making the same decision (for example, should I smoke) will always make the same decisions. If they make different decisions it must be that one is irrational. 2. Only additional or marginal costs and benefits are included in the analysis. Sunk costs are ignored. 3. A rational decision made using cost benefit analysis is the same as a good decision. 4. All of the above 5. None of the above 16. Economists believe that people make decisions “on the margin.” Which of the following statements is true regarding this marginal decision making process? 1. Marginal decision making involves a consideration of all opportunity costs, including those that are sunk. 2. Private decision making