ECON 202 Ch. 3

Economists mostly use optimization in​ differences, as opposed to optimization in​ levels, because​ ____________.

comparing different features of alternatives is simple.

You have the option to play tennis or a round of golf​ (but not​ both). The tennis match requires you to take 2 hours off from work and the round of golf requires you to take 4 hours off from work. Playing tennis has value to you equal to ​$60​, while golf has value to you equal to ​$125. Tennis courts are publicly available at no​ cost, but golf costs ​$20 per round. Suppose your wage from working is ​$12 per hour.

(In this​ case, the opportunity cost of your time playing tennis is ​$24​, from 2 hours multiplied by your ​$12 hourly wage. The opportunity cost of your time playing a round of golf is ​$48​, from 4 hours multiplied by your ​$12 hourly wage.) The net benefit of playing either sport is the VALUE of playing the sport to you MINUS the PRICE MINUS the OPPORTUNITY COST of your time required to play the sport.

You have been invited to play a​ 4-hour round of golf that has a value to you of ​$90. The total price to play the round of golf is ​$45. The net benefit of the round of golf is ​$? Now assume that you have a job that pays you $6 per hour. Would you be optimizing to accept the invitation to play​ golf?

1. 45 (Subtract value from total price) 2. Yes (90 value-45 price-24 opportunity cost)

When optimizing for total​ value, opportunity cost must be BLANK total cost. Assuming BLANK ​benefits, the lowest cost option is the optimal choice.

1. ADDED to 2. Equal

Advances in wireless communication technology reduce the​ non-financial costs of long​ commutes: People who ride trains can get work​ done, and people who drive cars have more entertainment options. Given this​ information, which of the following will be an effect on the geographic area of​ cities? How will this result impact people as they decide how close to live to the city where they​ work?

1. The total cost of commuting from any given distance to work will reduce because the indirect cost of the commute will fall. 2. They will be more willing to locate farther from the city .

Optimization using total value has three​ steps:

1. Translate all costs​ (including opportunity​ costs) and benefits into common​ units, like dollars per month. 2. Calculate the total net benefit of each alternative. ​(Benefit−​Cost) 3. Pick the alternative with the highest net benefit.

You and your​ friend, Jim, have just moved out of your dorm and into a new apartment. Both of you decide that you need to get a couch. Jim thinks you should get a new one from a furniture store nearby. You feel​ that, given your​ budget, it is best to buy a used one. Your other options are to buy one online or get a couch​ custom-made at the same furniture store. How would you arrive at an optimal solution​ here? Assume that your opportunity cost of time is​ $5 per hour. 1. You and Jim would need to consider​ ___________. 2. Now suppose that you have a summer job that pays you​ $15 per hour. How would your analysis​ change?

1. the direct costs and the indirect opportunity cost of your time required to shop. 2. With a​ $15-per-hour summer​ job, the opportunity cost of your time would increase.

When John determines what choice of walking shoes will give him the best bang for his buck​, he is using optimization based on BLANK When Janet looks at the additional value of purchasing a new laptop to the cost as compared to keeping her old​ one, she is using optimization based on BLANK .

1. total value 2. Marginal analysis

What is meant by comparative​ statics? Explain with an example.

A change in an​ outcome, such as consumption​, that results from a change in a​ factor, such as the price. OR A change in an​ outcome, such as saving​, that results from a change in a​ factor, such as the interest rate.

Assume that the average price for a​ 2,000-square-foot house in the city is ​$360,000 and the average rent for a​ 2,000-square-foot apartment in the city is ​$1,100 per month. Also assume that the average price for a​ 2,000-square-foot house in the suburbs is ​$220,000​, the average price for a​ 2,000-square-foot house in the county is ​$350,000​, and the average price for a​ 3,000-square-foot house in the suburbs is ​$470,000. Using comparative statics and the information​ above, what is the best estimate of the effect of living in the city​ (relative to living in the​ suburbs) on home​ prices?

Comparing similar houses in the city and in the​ suburbs, the difference is ​$80,000 ​(from an average price of a​ 2,000-square-foot house of ​$300,000 in the city minus an average price of a​ 2,000-square-foot house of ​$220,000 in the​ suburbs).

What is the difference between marginal values and average​ values?

Marginal values show the additional benefit or cost from consuming an additional unit of a​ good, while average values are the benefit or cost per unit of a good.

Some people choose to live close to the city​ center; others choose to live away from the city center and take a longer commute to work every day. Does this mean that those who stay away from the city center are being​ irrational?

No, because their opportunity cost of commuting must be lower.

Nikki decided to take the first available parking space as she entered the student lot. She felt that the first available space had a​ $5 premium compared with all other possible spaces since she did not want to risk being late for her exam.

Optimization in differences, since she is calculating the change in net benefits between alternatives.

Determine if the following statements better describe optimization in levels or optimization in differences. John is attempting to decide on a movie. He determines that the new Batman movie provides him with​ $5 more of a net benefit than the new Spiderman movie.

Optimization in​ differences, since he is calculating the change in net benefits between alternatives.

Marcia finds that the net benefit of flying from Chicago to Honolulu on a​ non-stop United Airlines flight is​ $400, and the net benefit for the same trip flying on a​ one-stop American Airlines flight is​ $200.

Optimization in​ levels, since she is comparing the net benefits between alternatives.

Reagan determined that the net benefit of taking the combination of two lecture courses and an online lecture course was​ $100. The same three courses online gave her a net benefit of​ $80, and all three in a​ lecture-based format gave her a net benefit of​ $90.

Optimization in​ levels, since she is comparing the net benefits between alternatives.

Optimization is the process that describes​ __________.

The choices that firms/households make

Does the principle of optimization imply that people always make the best​ choices?

Yes, it is a good approximation for the decisions people make.

Suppose you had information on the sales of similar homes just east and just west of the boundary between two school districts. Also suppose schools on one side of the school boundary are better than the schools on the other side in terms of test scores. You could estimate the average value that parents place on a​ one-point increase in test scores by​ ___________.

dividing the difference in the prices of similar homes between districts by the difference in test scores between districts.

If opportunity cost were to suddenly​ increase, total cost would

increase and net benefit would decrease.

Two outcomes are said to be independent when​ ____________.

knowing about one outcome does not help you predict the other outcome.

Optimization in levels examines​ ___________, while optimization in differences analyzes​ ____________.

total net benefits of​ alternatives; the change in net benefits.