Part two. chapter 1

In the following examples, state how you would use the principle of marginal analysis to make a decision. a. Deciding how many days to wait before doing your laundry.

Each day that you wait to do your laundry imposes a cost: you have fewer clean clothes to choose from. But each day that you wait also confers a benefit: you can spend your time doing other things. You will wait another day to do your laundry if the benefit of waiting to do the laundry that day is greater than the cost.

Liza needs to buy a textbook for the next economics class. The price at the college bookstore is $65. One online site offers it for $55 and another site, for $57. All prices include sales tax. The accompanying table indicates the typical shipping and handling charges for the textbook ordered online. a. What is the opportunity cost of buying online instead of at the bookstore? Note that if you buy the book online, you must wait to get it.

The opportunity cost of buying online is whatever you must give up to get the book online. So the opportunity cost of buying online is the sum of the shipping charges plus the opportunity cost of your time spent waiting for the book to arrive (at the bookstore the book is available immediately) minus the cost-saving you receive by buying online versus buying at the bookstore.

Use the concept of opportunity cost to explain the following: a. More people choose to get graduate degrees when the job market is poor.

The worse the job market, the lower the opportunity cost of getting a graduate degree. One of the opportunity costs of going to graduate school is not being able to work. But if the job market is bad, the salary you can expect to earn is low or you might be unemployed—so the opportunity cost of going to school is also low.

In each of the following cases, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make the situation efficient? a. Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances on when they are not in their rooms.

This is not efficient. If the lights were turned off, some students could be made better off without making other students worse off because the college would save money on electricity that it could spend on student programs. By leaving lights and appliances on when leaving their rooms, residents do not take into account the negative side effect they impose on their college—the higher cost of electricity. If students were forced to pay their own individual electricity costs (that is, if they fully took into account the cost of their actions), then they would turn the lights and appliances off when leaving their rooms. This situation would be efficient.

Which of the following situations describes an equilibrium? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like? a. Many people regularly commute from the suburbs to downtown Pleasant ville. Due to traffic congestion, the trip takes 30 minutes when you travel by highway but only 15 minutes when you go by side streets.

This is not equilibrium. Assume that all people care about is the travel time to work (not, for instance, how many turns they need to make or what the scenery is like). Some people could be better off using the side streets, which would cut down their travel time. Eventually, as the situation moves to equilibrium (that is, as more people use the side streets), travel times on the highway and along the side streets will equalize.

This morning you made the following individual choices: you bought a bagel and coffee at the local café, you drove to school in your car during rush hour, and you typed your roommate's term paper because you are a fast typist—in return for which she will do your laundry for a month. For each of these actions, describe how your individual choices interacted with the individual choices made by others. Were other people left better off or worse off by your choices in each case?

When you bought the bagel and coffee, you paid a price for them. You would not have bought that breakfast if your enjoyment of it (your welfare) had not been greater than the price you paid. Similarly, the café owner would not have sold you the bagel and coffee if the price he received from you were less than the cost to him of making them. This is an example of how everybody gains from trade: both you and the café owner are better off. When you chose to drive your car during the rush hour, you added to the congestion on the road. Your choice had a side effect for other motorists: your driving slowed everybody else down just a little bit more. Your choice made other motorists worse off. Typing your roommate's term paper in exchange for her doing your laundry is another example of the gains that come from trade. Both of you voluntarily agreed to specialize in a task that each is comparatively better at because you expected to gagain from this interaction. Your choice made both you and your roommate better off.

The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy family lives on the west side. Each family's diet consists of fried chicken and corn - on - the - cob, and each is self - sufficient, raising their own chickens and growing their own corn. Explain the conditions under which each of the following would be true. a. The two families are made better off when the Hatfields specialize in raising chickens, the McCoys specialize in growing corn, and the two families trade.

a. Gains from trade usually arise from specialization. If the Hatfields (compared to the McCoys) are better at raising chickens and the McCoys (compared to the Hatfields) are better at growing corn, then there will be gains from specialization and trade.

b. Show the relevant choices for this student. What determines which of these options the student will choose?

b. Below is a list of all of Liza's options and their purely monetary costs: Buy from bookstore $65 Buy from first site (price $55), 1-day delivery $55 + $13.98 = $68.98 Buy from first site (price $55), 2-day delivery $55 + $08.98 = $63.98 Buy from first site (price $55), 3- to 7-day delivery $55 + $03.99 = $58.99 Buy from second site (price $57), 1-day delivery $57 + $13.98 = $70.98 Buy from second site (price $57), 2-day delivery $57 + $08.98 = $65.98 Buy from second site (price $57), 3- to 7-day delivery $57 + $03.99 = $60.99 It is clear that Liza would never buy from the second site, where the book costs $57: for each delivery time, she is better off buying the book from the first site, where the book costs $55. It is also clear that she would never buy the book from the first site and have it delivered the next business day: it costs more that way ($68.98) than getting it from the bookstore (assuming that it is costless to get to and from the bookstore). But it is not clear whether she will buy the book from the bookstore or the first site with delivery times of 2 or 3-7 days: this depends on her opportunity cost of time. The higher the cost of waiting, the more likely she is to buy the book from the bookstore, where she does not need to wait.

b. The two families are made better off when the McCoys specialize in raising chickens, the Hatfields specialize in growing corn, and the two families trade.

b. Similar to the answer to part a, if the McCoys (compared to the Hatfields) are better at raising chickens and the Hatfields (compared to the McCoys) are better at growing corn, then there will be gains from specialization and trade.

b. Deciding how much library research to do before writing your term paper.

b. The more research you do, the better your paper will be. But there is also an opportunity cost: every additional hour you spend doing research means you cannot do other things. You will weigh the opportunity cost of doing one more hour of research against the benefit gained (in terms of an improved paper) from doing research. You will do one more hour of research if the benefit of that hour outweighs the cost.

b. Although they cost the same amount to prepare, the cafeteria in your dorm consistently provides too many dishes that diners don't like, such as tofu casserole, and too few dishes that diners do like, such as roast turkey with dressing.

b. This is not efficient. Instead of serving dishes that many diners do not like, the cafeteria should serve more of the equal-cost dishes that diners do like. That way, some students could be made better off without other students being made worse off.

b. At the intersection of Main and Broadway are two gas stations. One station charges $3.00 per gallon for regular gas and the other charges $2.85 per gallon. Customers can get service immediately at the first station but must wait in a long line at the second.

b. This might be an equilibrium. Those who buy gas at the first station would be worse off by buying gas at the second if the value of their time spent waiting exceeded the savings at the pump: they would save 15 cents per gallon but would incur the opportunity cost of waiting in a long line. You should expect very busy people (a high opportunity cost of time) to buy gas at the first station. Those who buy gas at the second station might be worse off by buying gas at the first: they would not have to wait in line but would pay 15 cents more per gallon. You should expect people with a lot of free time (a low opportunity cost of time) to buy gas at the second station.

b. More people choose to do their own home repairs when the economy is slow and hourly wages are down.

b. When the economy is slow, the opportunity cost of people's time is also lower: the wages they could earn by working longer hours are lower than when the economy is booming. As a result, the opportunity cost of spending time doing your own repairs is lower—so more people will decide to do their own repairs

c. Deciding how many bags of chips to eat.

c. Each bag of chips you eat gives you a benefit: it satisfies your hunger. But it also has a cost: the money spent for each bag (and, if you are weight - conscious, the additional calories). You will weigh the cost against the benefit of eating one more bag. If the cost is less than the benefit, you will eat that one more bag of chips

c. There are more parks in suburban than in urban areas.

c. The opportunity cost of parkland is lower in suburban areas. The price per square foot of land is much higher in urban than in suburban areas. By creating parkland, you therefore give up the opportunity to make much more money in cities than in the suburbs.

c. Every student enrolled in Economics 101 must also attend a weekly tutorial. This year there are two sections offered: section A and section B, which meet at the same time in adjoining classrooms and are taught by equally competent instructors. Section A is overcrowded, with people sitting on the floor and often unable to see the chalkboard. Section B has many empty seats.

c. This is not an equilibrium. If students from section A attended section B instead, they would be better off: they could get seats and see the chalkboard without incurring any cost (since the section meets at the same time and is taught by an equally competent instructor). Over time, you should expect students to switch from section A to section B until equilibrium is established.

c. The enrollment for a particular course exceeds the spaces available. Some students who need to take this course to complete their major are unable to get a space even though others who are taking it as an elective do get a space.

c. This is not efficient. In an efficient scheme, spaces would be allocated to those students who value them most. In this case, however, some spaces are allocated to students who value them less (those who take the course as an elective) than other students (those who need the course to graduate). Efficiency could be improved as follows: if a student who is not currently enrolled in the course values it more than a student who is enrolled, then the unenrolled student should be willing to pay the enrolled student to give up his or her space. At some price, this trade would make both students better off and the outcome would be efficient.

d. Deciding how many lectures of a class to skip

d. Each lecture that you skip implies a cost: getting further behind with the material and having to teach it to yourself just before the exam. But each skipped lecture also means you can spend the time doing other things. You will continue to skip lectures if the cost of skipping is lower than the benefit of spending that time doing other things.

d. Convenience stores, which have higher prices than supermarkets, cater to busy people.

d. The opportunity cost of time is higher for busy people. Driving long distances to supermarkets takes time that could be spent doing other things. Therefore, busy people are more likely to use a nearby convenience store.

e. Fewer students enroll in classes that meet before 10:00 A.M.

e. Before 10:00 A.M. the opportunity cost of time for many students is very high—it means giving up an extra hour's sleep. That extra hour is much more valuable before 10:00 A.M. than later in the day.