Problem sets 1

Aliyah is facing a "how many" decision when trying to decide how many workers to hire. She can simplify the decision making process by calculating the marginal benefit and marginal cost of each worker. With this information, the question becomes whether or not to hire one more worker. The marginal cost of each worker is the $58,000 salary she pays plus the $6,000 for a computer and equipment. Each worker has the same marginal cost, namely, $64,000. The marginal benefit of each worker is the additional revenue that Aliyah receives from hiring the worker. With the first worker, the firm can serve 11 clients. Each client pays $10,000 a year, so the marginal benefit of the first worker is $110,000. With the second worker, the firm can serve 20 clients instead of the 11 clients served with 1 worker. This is an additional 9 clients, each paying $10,000 a year. The marginal benefit of the second worker is $90,000. With the third worker, the firm can serve 27 clients instead of the 20 clients served with 2 workers. This is an additional 7 clients, each paying $10,000 a year. The marginal benefit of the third worker is $70,000. With the fourth worker, the firm can serve 32 clients instead of the 27 clients served with 3 workers. This is an additional 5 clients, each paying $10,000 a year. The marginal benefit of the fourth worker is $50,000. Aliyah should hire additional workers as long as the marginal benefit is greater than the marginal cost. The marginal benefit of the first worker is $110,000, and the marginal cost is $64,000. Aliyah should hire the first worker. The marginal benefit of the second worker is $90,000, and the marginal cost is $64,000. Aliyah should hire the second worker. The marginal benefit of the third worker is $70,000, and the marginal cost is $64,000. Aliyah should hire the third worker. The marginal benefit of the fourth worker is $50,000, and the marginal cost is $64,000. Aliyah should not hire the fourth worker. Aliyah's economic surplus is maximized when she hires three workers. **marginal cost is all 64k

Aliyah is preparing to expand her IT consulting company. The current market rate for IT professionals is $58,000 per year. Each employee she hires will also require a computer and equipment that costs $6,000 per employee annually. Hiring more employees means that Aliyah can provide consulting services to more clients each year. Each client Aliyah has will pay her $10,000 per year. The number of clients Aliyah can take on is dependent on the number of workers she hires and is depicted in the accompanying table. 0 workers=0 clients oer year 1 worker=11 clients per year 2 workers=20 clients per year 3 workers=27 clients per year 4 workers=32 clients per year -What is the marginal cost & beneift of each worker? -using the rational rule to maximize her economic surplus, she should hire_____workers

A: a Economics is not just about money, financial markets, business or government policy, though it can be helpful for understanding each of these. Economics is a way of thinking, and the economic approach can also help you understand politics, families, careers, and just about every aspect of your life. While governments also make decisions, governments are not the focus of the economic approach. The same can be said of financial markets. Financial markets are of interest to economists, but the underlying theory is about the behavior of the players and stakeholders in the market.

Consider the following statement: "Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money." Is this statement true or false? a: False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making. b: True, financial markets are the primary focus of economics. c: False, even though economists use money as a form of measurement, economics is better described as the study of financial markets. d: False, even though economists use monetary terms often, economics is better described as a governmental approach to improving market outcomes.

Answer: 2 a. For many people contemplating the choice to enter the labor force or go to college, the decision is heavily influenced by the unemployment rate. When unemployment rates are high, the job market is said to be slack, and many candidates will be competing for open positions. The increase in college enrollments despite the increase in tuition indicates that individuals felt they were better off in college than in the labor market. They chose to increase their human capital by attaining a college degree. b.When the unemployment rate is high, the opportunity cost of attending college is low since the potential earnings in the job market are low.

During the economic downturn of 2008-2009, the unemployment rate increased to nearly 10%. At the same time, the price of college tuition and the number of college enrollees increased. a. Which statement best explains why more people enrolled in college during this time period even as the price of tuition increased? More people enrolled because: 1)of the bandwagon effect. When something becomes popular or trendy, ever more people are willing to pay high prices for it. 2)if the next best option was unemployment, many individuals may have preferred to enroll in college and gain new skills in hopes of increasing their future employment prospects. 3)of the social pressure people feel to go to college. Universities exploited this and increased the price of tuition without losing many students. 4)if the next best option was unemployment, many individuals may have preferred to enroll in college and live off of student loans while waiting for the job market to improve. b. the core principle that explains this is________

Marginal principle The statement in part d illustrates the marginal principle. The decision to read this textbook can be broken down into smaller decisions. Instead of deciding "how many" pages to read, you could decide whether to read one more page or do one more practice problem. You thereby assess whether doing a bit more or a bit less is the best way to gain a solid understanding of economics principles.

Each page that you read and each practice problem that you complete will help you increase your understanding of the material.

How would you compare decisions that have nothing in common? willingness to pay

How would you compare decisions that have nothing in common?

It is possible that the majority of AbbVie's profits come from developing and producing drugs for treating common chronic conditions. That does not, however, mean it should disregard the market for drugs addressing rare diseases. Perhaps the market for drugs for rare conditions is less saturated with competition than the market for drugs for common conditions. In that case, AbbVie could gain a greater share of the market for drugs for rare conditions. Additionally, individuals requiring drugs for rare conditions may be more likely to require these drugs long‑term, allowing AbbVie to capture a customer for life. The marginal principle helps businesses determine if they should venture into a new market, expand or differentiate a product line, or continue producing a product. In this case, AbbVie must be developing and producing drugs for rare diseases because the marginal benefit exceeds the marginal cost.

In 2016, the top-selling pharmaceutical drug in the world was AbbVie's Humira, which is used for the treatment of several common, chronic conditions. The majority of its profits are derived from treatment of the most common diseases, but AbbVie also develops drugs for rare conditions. Why might AbbVie develop drugs for rare diseases instead of investing all of its resources toward drugs for common diseases? It is possible that: a) framing effects may be enticing AbbVie to develop and produce drugs for rare conditions. Since these drugs are more expensive, AbbVie will make a large profit. b)the opportunity‑cost principle may encourage AbbVie to produce drugs for rare conditions, because the full benefits outweigh the costs. The company must be maximizing its total economic surplus. c)the marginal principle may be guiding AbbVie in determining if it is worth producing drugs for rare diseases. Since it is developing and producing treatments for rare diseases, the marginal benefits must exceed the costs. D)the interdependence principle may be guiding AbbVie to develop and produce drugs for rare conditions. Common chronic and rare conditions are often experienced by the same people, so AbbVie can easily produce drugs for both

1)Ivan values the car at $45,000 and receives $55,000, so his economic surplus is $10,000: $55,000−$45,000=$10,000$55,000−$45,000=$10,000 2)Samantha values the car at $72,000, and it costs her $55,000, so her economic surplus is $17,000: $72,000−$55,000=$17,000 3)Total surplus is the combination of Ivan and Samantha's surplus, $27,000: $10,000+$17,000=$27,000

Ivan has inherited his mother's 1963 Chevrolet Corvette, which he values at $45,000. He decides that he might be willing to sell it, so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000 for one. 1.How much economic surplus does Ivan gain from engaging in this exchange? 2) How much economic surplus, if any, does Samantha gain from engaging in this exchange? 3)How much total surplus, if any, is gained from this exchange?

a. Jade will earn a score of 60 when she spends 0 hours studying for economics, and she will earn a score of 98 when she spends 4 hours studying for economics. Thus, she will realize a score increase of 38 points if she spends all 4 hours studying economics. If she spends 4 hours studying economics, she has no time to study for astronomy, and her astronomy score will not increase past the predicted value of 70 when she does not study for astronomy. Thus, point A occurs at (0, 38). Using the same methodology to solve for the location of point B, Jade will earn a score of 95 when she spends 3 hours studying economics, resulting in a point increase of 35 points beyond her predicted score of 60 when she spends zero hours studying. If she spends 3 hours studying economics, she has 1 hour to commit to studying astronomy. This 1 hour spent studying astronomy will raise her exam score from a 70 to an 83, giving her a 13 point increase. Point B occurs at (13, 35). Studying for economics for 2 hours allows Jade to also study for astronomy for 2 hours. This time allocation gives her exam score increases of 17 points in astronomy and 30 points in economics, resulting in a location of (17, 30) for point C. If Jade spends 3 hours studying astronomy, she will have 1 hour to study for economics. This improves both her astronomy and economics scores by 20 points. Point D occurs at (20, 20). If Jade spends all 4 hours studying astronomy, she will improve her astronomy score by 22 points, but her economics score will not increase beyond the predicted value of 60 when she does not study for economics. Thus, point E occurs at (22,0). b. If Jade spends a third hour studying economics, then her time spent studying for astronomy will decrease from 2 hours to 1 hour. As a result, Jade's astronomy exam score will fall from 87 to 83, making the opportunity cost of a third hour of studying economics equal to 4 points on her astronomy exam. c. Add together the combined scores of all possible time allocation possibilities for Jade. Her maximum combined score is 178 points and occurs when she spends 3 hours studying economics and 1 hour studying astronomy. You can also compare the costs and benefits of spending the next hour studying for one subject relative to the other. When Jade spends her 4th hour studying for economics and spends no time studying for astronomy, her economics score rises by 3 points, and her astronomy score is 13 points lower than it would be if she committed one hour to the subject matter. Thus, she has a loss of 10 points in her combined score. If she spends 3 hours studying for economics and one hour studying for astronomy, her economics score will decline by 3 points (relative to if she had spent a 4th hour studying economics), but her astronomy score will rise by 13 points, giving her a net gain of 10 points in her combined score. Conducting this exercise for the other time allocation possibilities shows that the largest net gain in Jade's score occurs when she spends 3 hours studying economics and 1 hour studying astronomy. d. If Jade's laptop dies and refuses to start, she will lose access to all of her valuable notes and class materials. It becomes more challenging to study, so Jade will not be able to improve her scores as much as before in the allotted 4 hours. This mimics a decrease in productivity and would be represented by a leftward (inward) shift of the original production possibilities frontier because studying becomes more difficult.

Jade has midterms in economics and astronomy tomorrow and only has four hours left to study. The accompanying table provides the combinations of time spent studying economics and astronomy and her expected exam scores. Hours spent studying econ: 0 1 2 3 4 Econ exam score: 0hr=60 1hr=80 2hr=90 3hr=95 4hr=98 Hours spent studying astronomy: 0 1 2 3 4 astron exam score: 0hr=70 1hr=83 2hr=87 3hr=90 4hr=92 a) graph b)Suppose Jade spends the first two hours studying economics. The opportunity cost of spending the third hour studying economics is _______ points on her ___________ exam. c)Suppose Jade's goal is to maximize her combined exam scores. Calculate how many hours she should spend studying economics and how many hours she should spend studying astronomy She should spend ____hrs on econ and ____hrs on astronomy d)Suppose Jade's laptop dies and refuses to start up. All her notes and class materials (for both classes) are saved on its hard drive. jade's prdocution possibilities curve will shift to the _____________

There are three costs associated with Jia going out to dinner with her friend: the price of the meal, which is $40; the 20% tip, which adds another $8; and taking an Uber there and back, which costs $10. So, the total cost is $58. $40+$8+$10=$58$40+$8+$10=$58 There are three benefits associated with Jia going out to dinner with her friend: the $25 value that Jia receives from the restaurant meal itself; the $30 value that Jia receives from having dinner with her friend; and the $8 Jia saves on groceries by not eating at home. The total benefit, therefore, is $63. $25+$30+$8=$63$25+$30+$8=$63 Since the total benefit is $63, and the total cost is $58, going to dinner with her friend will yield Jia $5 worth of economic surplus. Jia should go out to dinner with her friend because the benefit outweighs the cost.

Jia is considering whether to go out to dinner at a restaurant with her friend. The meal is expected to cost $40, Jia typically leaves a 20% tip, and an Uber will cost $5 each way. Jia values the restaurant meal at $25. Jia enjoys her friend's company and is willing to pay $30 just to spend an evening with her. If Jia does not go out to the restaurant, she will eat at home, using groceries that cost her $8. a. calculate Jia's costs associated with going out with her friend b. calculate Jia's benefits associated with going out with her friend ..based on the information...Jia 1) should go out to dinner 2) should eat at home

There are four types of interdependencies. The first is dependencies between people in the same market. Khaled is aware of the conditions in the market for daycare facilities. If there were few families searching for daycare, he would need to compete harder for clients when he opens his facility. In this case, he is confident he could easily fill his client list. The second type of interdependency is dependencies between markets. An influx of teachers in the market drives down wages for all teachers, including preschool teachers. This makes Khaled's decision dependent on other markets for teachers. Not only does it affect his pay, but also, if he opens a daycare center, it will affect the cost of hiring teachers to work at the center. The third type of interdependency is dependencies between your own choices. Khaled must consider all the factors that might influence his choice. Pay is one important factor that is affected by other markets for teachers, but many other tangible factors go into Khaled's decision. Being a business owner comes with many responsibilities. In addition, Khaled will give up free time in the summer. This is a trade‑off between his individual decisions. The fourth is dependency through time, Khaled knows that he could be receiving a raise in six months. The knowledge of the potential promotion and other future promotions will affect his future income as a teacher and ultimately his decision regarding whether or not to open a daycare facility.

Khaled is a preschool teacher working at a public school, but he is considering quitting his job to start a daycare facility of his own. Indicate which of the four types of interdependency is most relevant to each factor in Khaled's decision. Use the market for daycare facilities as Khaled's market of interest. a) Khaled knows there are few daycare facilities in the area, but many families looking for daycare. =example of dependencies... b) An increase in graduation rates for teachers saturates the market for preschool teachers. This decreases the wages of teachers. =example of dependencies... c) If Khaled opens his own facility, he will be responsible for taxes, insurance, licensing, and facility upkeep, among other things. However, as a teacher Khaled will only need to keep up his teaching license. In addition, Khaled will not be able to take a long vacation in the summer if he runs a daycare center. =example of dependencies... d)Khaled is up for a raise in the next 6 months at his teaching job. =example of dependencies...

a)If Marah decides to open the lemonade stand, her revenue will be $20 from the 20 cups of lemonade she expects to sell. Her total costs, consisting of $15 for the cups and lemonade mix and $10 for the sign, will be $25. So her profits will be -$5. $20−$25=−$5 b)Marah should open the stand. If she decides not to open the stand, she will not receive any revenue. She will also not use any cups or lemonade mix, although she has already spent the money to make the sign. If she does not open the stand, her profits will be -$10. She take a loss either way, but she would be better off opening the stand. c)The $10 she already spent on the sign is a sunk cost. She has already spent the money, and so it is gone regardless of whether she opens the stand. Thus, it is a sunk cost and should be disregarded when she makes her operating decisions. She should only consider the $20 in additional revenue she will receive by opening the stand and the additional $15 in costs. In this case, she will be $5 better off by opening the stand than not opening it.

Marah is deciding whether or not to open a lemonade stand. She expects to sell 20 cups of lemonade for $1 per cup. She already made a sign that cost her $10 and will have $15 worth of additional costs for cups and lemonade mix if she decides to open the stand. a) how much profit will she earn? b) she should or should not open the lemonade stand? c) The $10 spent on the sign represents a ____cost.

The marginal benefit is the additional benefit Neal receives from the last cup of coffee consumed. With the first cup of coffee, Neal has a marginal benefit of $8. This is the difference between his total benefit of drinking one cup and his total benefit of drinking no cups of coffee. With the second cup of coffee, Neal has a marginal benefit of $6. This is the difference between the total benefit of $14 that he receives from drinking two cups and the $8 that he receives from drinking one cup. With the third cup, Neal has a marginal benefit of $4. This is the difference between the total benefit of $18 that he receives from drinking three cups and the $14 that he receives from drinking two cups. With the fourth cup, Neal has a marginal benefit of $2. This is the difference between the total benefit of $20 that he receives from drinking four cups and the $18 that he receives from drinking three cups. With the fifth cup, Neal has a marginal benefit of $1. This is the difference between the total benefit of $21 that he receives from drinking five cups and the $20 that he receives from drinking four cups. Neal's first cup gives him a marginal benefit of $8, which is greater than his marginal cost of $3. The second cup gives him a marginal benefit of $6, which is also greater than the marginal cost of $4. The same is true for the third cup, which gives him $4 of marginal benefit. Consuming the fourth cup gives Neal a marginal benefit of $2, which is less than what it costs him to purchase the coffee. Neal should stop drinking the coffee when he finishes his third cup. **just taking the difference 1:8 2:6 3:4 4:2 5:1 He should drink 3 cups of coffee per day

Neal is a coffee drinker. At the local coffee shop, the price of a cup of coffee is $3. Neal's total benefits from drinking coffee are indicated in the accompanying table. Use this information to calculate Neal's marginal benefit of consuming each cup of coffee. 1 cup of coffee: $8 benefit 2 cup: $14 3:$18 4:$20 5:$21 -what is the marginal benefit of each cup and how many should he drink?

y, x

Price is graphed on the ___ axis, and Quantity is on the ___ axis

Interdependence The statement in part a illustrates the interdependence principle—specifically, dependencies through time. Decisions that you make today will have implications for outcomes in the future. In this case, the decision to read this textbook today will improve your ability to understand concepts that you will be exposed to in future courses.

Reading this textbook will help establish a solid foundation for understanding concepts you will learn in more advanced economics courses. -which principle?

cost-benefit principle. The statement in part b illustrates the cost-benefit principle. Ultimately, your decision to read this textbook will be determined by the benefits you receive and the costs you incur. The benefits include a better understanding of the material, which will help you earn a better grade. Additionally, and more importantly, the benefits may include better decision-making in your everyday life. The cost of reading this book is the time and effort you must put forth in reading it.

Reading this textbook will require time and effort, but doing so will help you improve your grade in this course." This statement is related to the

opportunity cost principle The statement in part c illustrates the opportunity cost principle. Reading this textbook will require time that could have been spent on other activities, such as studying for another exam or spending time with friends. Whenever you attempt to determine the costs of an action, you should ask "or what?" The answer to that question will help you determine the opportunity cost incurred in reading this textbook.

The time you will spend reading this textbook can also be used to study for your chemistry exam." This statement is related to the

individual decisions

What drives all economic forces?

A Opportunity cost highlights the question, "Should I go to the movie? Or what else?" Absolutely go to the movie, short or long, if that is the best way to spend your time compared to other alternatives. Keep in mind, there is an implicit assumption that the movies under consideration are of similar quality.

Your friend remarks that longer movies are a better deal than shorter movies because the ticket price is the same in both cases. Therefore, the longer movie provides more benefit for the same cost as a shorter movie. Which of the following is the best argument against your friend's claim that longer movies provide more benefit than shorter movies? Based on the: a)opportunity cost principle, the length of the movie does not matter as long as watching a movie is the best way to spend your time compared to other alternatives. b) cost‑benefit principle, the benefits of a longer movie exceed the costs when compared to a shorter movie. c)marginal principle, you should only continue to watch an additional movie if it is shorter than the first movie. d)interdependence principle, longer movies are affected by the market for shorter movies.

b) cost of making trip is more than$5 you can benefit by making a 20 minute drive. The benefit is a $5 savings. The costs would include the cost of gas to drive to the other store and the opportunity cost of the time you spend driving to the other store. In this scenario, you would only make the trip to the other branch if the cost of gas and the cost of your time driving are less than $5. Scenario b is similar. The costs are the same and the benefit is still $5. Again, you would only make the trip to the other branch if the cost of gas and the cost of your time driving are less than $5.

a. You are about to buy a calculator for $10, and the sales-person tells you that the model you want to buy is on sale for $5 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if: a) cost of making trip is less than $5 b) cost of making trip is more than

a) cost of making trip is less than $5

b. You are about to buy a laptop for $1,000 and the sales-person tells you that the model you want to buy is on sale for $995 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if: a) cost of making trip is less than $5 b) cost of making trip is more than$5

framing effect

differences in the way decisions are described can lead people to make different (illogical) decisions

benefits - costs from a decision, measures how much the decision improved your well-being

economic surplus

possibility product frontier

shows different outputs attainable with a set of scarce resources, describes the most you can produce given the circumstances (more of A means less of B, etc.) Ex: study more econ, less studying for korean

your other decisions, (you have limited resources, other constraints) decisions made by others within the market, decisions made by others in other markets, expectations over time

what affects your decision via the interdependence principle? (4)