during the day working at a part-time job for less time spent at leisure time. The opportunity
cost of the higher income is the leisure time given up.
2. Explain what economists mean by rational choice and think of three choices that
you’ve made today that are rational.
A rational choice is one that compares the costs and benefits and achieves the greatest
benefit over cost for the person making the choice. Three rational choices are: a) The choice
to skip breakfast to go to class. In this case the benefit is the higher grade in the class and the
cost is the breakfast forgone. b) The choice to stop talking with a friend on the phone and
start studying for an impending exam. In this case the benefit is the resulting higher grade in
the class and the cost is the conversation forgone. c) The choice to do laundry today rather
than watch television. In this case the benefit is clean clothes to wear and the cost is the loss
of the entertainment the television show would have provided.
3. Explain why opportunity cost is the best forgone alternative and provide
examples of some opportunity costs that you have faced today.
When a decision to undertake one activity is made, often many alternative activities are no
longer possible. Often these activities are mutually exclusive so only the highest-valued
alternative is actually forgone. For instance, the decision to go to a student’s 8:30 AM class
eliminates the possibility of sleeping in during the hour and of jogging during the hour. But in
this case, it is impossible to both sleep in and to jog during the hour, so the opportunity cost of
attending class cannot be both activities. The opportunity cost of attending class is only the
activity that otherwise would have been chosen—either sleeping in or jogging—whatever
activity is the most highly valued of the forgone alternatives.
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WH AT IS ECO NO MICS? 3
4. Explain what it means to choose at the margin and illustrate with three choices at
the margin that you have made today.
Choosing at the margin means choosing to do a little more or a little less of some activity. Three
examples are: a) When a student faces a chemistry and an economics final exam in one day, the
student must determine whether spending the last hour studying a little more chemistry or a little
more economics will yield a better contribution (marginal benefit) to his overall GPA. b) A student
buying a computer must decide whether the marginal benefit from adding 1 GB of additional
memory is worth the marginal cost of the additional memory. c) A student football fan with a choice
of a cheap seat in the student bleachers located at the far end of the playing field or a more
expensive seat located on the 30 yard line must determine whether the marginal benefit from
watching the game in a better seat is worth the marginal cost of the higher ticket price.
5. Explain why choices respond to incentives and think of three incentives to which
you have responded today.
People making rational decisions compare the marginal benefit from an action to its marginal cost.
A person’s choice changes when the incentive—the marginal benefit or the marginal cost changes.
Examples of incentives are: a) A student studies because of the incentives offered by grades. b) A
student is more likely to attend a class if attendance is factored into the grade. c) A student might
attend a meeting of a club if the student’s significant other is eager to attend the meeting.
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1. Distinguish between a positive statement and a normative statement and provide
examples.
A positive statement is about what is. It is testable. A normative statement is about what ought to
be. It is not testable because there is no universally approved criterion by which the statement can
be judged. “I will receive an A for this course,” is a positive statement made by an economics
student—it might not be true, but it is testable. “I will receive a good grade for this course,” is a
normative statement. Whether someone agrees with it depends on his interpretation of what makes
for a “good” grade.
2. What is a model? Can you think of a model that you might use in your everyday
life?
A model is a description of some aspect of the world. An economic model is a description of some
aspect of the economic world that includes only those features that are needed for the purpose at
hand. An example of a model is a GPS map. It reflects only those aspects of the real world that are
relevant to the user in reaching her destination and avoids information irrelevant to travel.
3. How do economists try to disentangle cause and effect?