Econ Fall Exame 2016

EXAMINATION #1 -- ECO 6321

CHOOSE 10 OUT OF THE FOLLOWING 14 TERMS TO DEFINE AND PROVIDE AN ECONOMIC EXAMPLE ILLUSTRATING THE TERM (1 point each) [total 10% out of 100%]

1. Opportunity cost: A benefit, profit, or value of product or service that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost. Example: I would have gone to the Hawaii vacation since it cost less and the tickets were not refundable but I have to go to Venice vacation instead if the opportunity cost doesn't make sense to most people.

1. Marginal Revenue: Increase in the gross revenue of a firm produced by selling one additional unite of output. Example: Selling one more Pizza or one less is really made no difference in the bottom line and amounted to nothing more than marginal revenue for the troubled tech company.

1. Hidden-cost fallacy: It is an expense not normally included in the purchase price of a product or service. occurs when you ignore relevant costs. A common hidden-cost fallacy is to ignore the opportunity cost of capital when making investment or shutdown decisions. Example: When making the commitment to buy a home. There are hidden costs during the purchasing like application fees, inspection fees, closing costs. these costs can drive the final price up by thousands of dollars.

1. Learning Curves: It is an important modern concept according to which cumulative experience in the production of a product over time increases efficiency in the use of inputs such as labor and raw materials and thereby lowers cost per unit of output. ”Look ahead and reason back”. Page 87. Example: Every time a pizza shop produce more than one order the managerial cost decreases by 20%, When the 2st pizza cost $10 then the next pizza will cost $8, then the 3rd will cost $6 and the 4th $5.

1. Economies of Scope:  It is an economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced. Example: I was looking into our economies of scope to see what was going on and what we needed to do to make business run smoother.

1. Fixed-cost fallacy: It is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is a cost that we cannot get back. Example: Signup a 12 month gym membership, costing $40/month. I have committed to spending 12*$40 = $480. Once I have signed the contract, I have effectively committed to spend the $480. It is now a fixed cost fallacy  I can’t get it back. Whether if I go to the gym or not, makes no difference to the cost.

1. Inferior Good: It is a type of good whose demand declines when income rises. It is inversely related to the income of the consumer. Example: When income is low, it makes sense to ride the bus. But as income increases, people stop riding the bus and start buying cars. It's acceptable to most people to ride the bus when they can't afford a car. But as soon as they can afford one, they buy a car and stop riding the bus. Bus riding declines as income increases.

1. Buyer surplus: It is an economic measure of consumer benefit, which is calculated by analyzing the difference between what consumers are willing and able to pay for a good or service relative to its market price, or what they actually do spend on the good or service. Example: I was ready to buy a Pizza. I was mentally prepared to pay $3 for one slice which shown on menu. He owner offers the slice for $1.5 only. I immediately purchased the 2 pieces and said ‘thank you’.

1. Cross-Price Elasticity of Demand: It is an economic measurement that show how the quantity demanded for one good responds when the price of another good changes. Example: Peanut butter and jelly are compliments. If the price of peanut butter goes up, the demand for jelly will probably go down due to less people wanting to make PB&J sandwiches.

1. Income Elasticity of Demand: It is an economic measurement that shows how consumer demand changes as consumer income levels change. It is reflected in how people change their consumption habits with changes in their income levels. Example: Demand for staple food items normally does not increase with higher income levels. But demand for gourmet food or restaurant food does increase as individual's income grows. Also called income sensitivity of demand, it is mathematically expressed as percent change in quantity demanded ÷ percent change in income.

1. A manager of a day-care center in Winston-Salem, North Carolina has a clearly stated policy that parents are supposed to pick up their children by 6pm.  But often parents are late.   Each week, there is an average of eight late pickups.  To combat tardiness, the manager of the center instituted a fine of $3 per child per incident.  Surprisingly, the number of late pickups more than doubled, to twenty per week.  Why?