Chapter 9 Making Decisions

Question 1

accounting profit

Answer 1

revenue - explicit costs and depreciation

greater than econ profit

Question 2

economic profit

Answer 2

revenue - total opportunity costs

Question 3

marginal cost

Answer 3

additional cost incurred by doing 1 more of an activity

Question 4

principal of marginal analysis

Answer 4

optimal quantity of an activity is the quantity at which marginal benefit = marginal cost

Question 5

sunk cost

Answer 5

cost that is already encountered, shouldn’t influence choice

Question 6

rational decision

Answer 6

a decision made that leads to the option they most prefer

Question 7

reasons why people make a rational decision that results is a lower profit

Answer 7

1. concerns about fairness
2. bounded rationality (laziness)
3. risk aversion

Question 8

reasons why people make an irrational decision

Answer 8

1. misperceived opportunity cost
2. being overconfident
3. unrealistic expectations about future behavior
4. counting dollars unequally
5. loss aversion (10-5 vs 5)
6. status quo bias (don’t want change)