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Flashcards in Hw 1 Deck (8)
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1
Q

We assume economic agents make decisions based on

A

margins

2
Q

The benet of the highest valued alternative when making a choice is the

A

opportunity cost

3
Q

Net refers to the

A

benefit minus the cost

4
Q

Not an example of scarcity

A

time, money, oil, oxygen

5
Q
  1. Fred currently works for a corporate law firm where he earns $125,000 per year. He is considering opening his own legal practice, where he expects to earn $200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for $50,000 per year. A law clerk could be hired for $35,000 per year.
    (a) Would Fred’s legal practice be profitable?
    Yes, he would earn a profit of $200,000-$50,000-$35,000=$115,000
A

Yes, he would earn a profit of $200,000-$50,000-$35,000=$115,000

6
Q
  1. Fred currently works for a corporate law firm where he earns $125,000 per year. He is considering opening his own legal practice, where he expects to earn $200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for $50,000 per year. A law clerk could be hired for $35,000 per year.
    (b) What are the economic costs of Fred’s legal practice?
A

The economics costs are the opportunity cost plus the accounting costs, $125,000+$85,000=$210,000

7
Q
  1. Fred currently works for a corporate law firm where he earns $125,000 per year. He is considering opening his own legal practice, where he expects to earn $200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for $50,000 per year. A law clerk could be hired for $35,000 per year.
    (c) Is it economical for Fred to open his own legal practice?
A

No, his economic costs are larger than his revenue ($200,000).

8
Q

Choose a good or service and provide a description of the market based on what we have covered in this section (Chapter 3). This will require at least one graph with labels and all curves explained.

Some questions you should answer for this section are “who are the buyers? the sellers? how do they trade? are there any intermediaries?” You will need a bit more as well based on what we have learned.

A

The market I have chosen is the market for gasoline, particularly the market between oil companies and car owners. This market is most notably expressed in the transactions between gas stations and car owners. The car owners are the buyers in this case, those with gas-based vehicles that require the gasoline to operate. The sellers here are oil companies such as BP and shell. The exchange between buyers and sellers occurs through intermediaries, the gas stations. Which are leased from the oil companies by local entrepreneurs. These gas stations pay rent for the building (normally to the oil company that typically owns the land, but not always) and a fixed fee for the gas they purchase. They sell this gas to consumers at a mark-up which is their profit.
The buyers have no substitute for gas to fuel their vehicles but many options for gas stations and this competition keeps the market reasonably close to a perfectly competitive market with manageable prices. The price paid is always advertised on a sign and non-negotiable. Within the gas station there are many alternatives for types of gasoline, but if you vehicle is able to operate on the lowest ppm type gas then that is what you should purchase as the ppm gases don’t actually improve your mileage per dollar spent they are just cleaner burning.
The market between gas stations and car owners in maintained by regular deliveries between the oil company and the gas station which are based on a contract between the pair. This delivery can be disrupted by natural disasters and has been an important policy point for governments to maintain in order to ensure the ability of its citizens to drive.
The graph for this is just a normal supply and demand (so I won’t be drawing it here).