Problem Set 2 Chapter 1

14. Tony notes that an electronics store is offering a flat $20 off all prices in the store. Tony reasons that if he wants to buy something with a price of $50 that it is a good offer, but if he wants to buy something with a price of $500 it is not a good offer. This is an example of A. inconsistent reasoning; saving $20 is saving $20. B. the proper application of the cost-benefit principle. C. rational choice because in the first case he saves 40% and in the second case he saves 4%. D. marginal cost equals marginal benefit thinking.

A. inconsistent reasoning; saving $20 is saving $20.

13. Ginger bought an MP3 player that came with a $10 rebate. Ginger should fill out and mail in the rebate form if A. the opportunity cost of the time and trouble of sending in the rebate forms is less than $10. B. the opportunity cost of the time and trouble of sending in the rebate forms is more than $10. C. she would have bought the MP3 player without the rebate, and so sending in the rebate involves no opportunity cost. D. Ginger's surplus from purchasing the MP3 player was less than $10.

A. the opportunity cost of the time and trouble of sending in the rebate forms is less than $10.

Units of Activity/Total Cost/Total Benefit 1 $3 $10 2 $4 $14 3 $6 $16 4 $10 $20 5 $15 $24 6 $21 $28 7 $28 $29 10. Refer to the figure above. The average benefit of 4 units of activity is A. $4 B. $5 C. $6 D. $10

B. $5

The following table shows the relationship between the speed of a computer's CPU and the benefits and costs. Assume that all other features of the computer are the same, i.e., CPU speed is the only source of variation. CPU Mhz/Total Benefit/Marginal Benefit/Total Cost/Marginal Cost 600 $1,000 ----- $900 ----- 700 $1,500 ----- ----- $100 800 ----- $400 $1,400 ----- 900 $2,200 ----- $1,900 ----- 1,000 $2,400 ----- ----- $600 16. The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is A. $1,500. B. $500. C. $50. D. $5.

B. $500.

5. If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125 then the marginal benefits are A. 100, 120, and 125. B. 100, 20, and 5. C. 100, 609, and 41.67. D. 100, 240, and 375.

B. 100, 20, and 5.

Units of Activity/Total Cost/Total Benefit 1 $3 $10 2 $4 $14 3 $6 $16 4 $10 $20 5 $15 $24 6 $21 $28 7 $28 $29 12. Refer to the figure above. According to the cost-benefit principle, the level of activity that provides the largest net benefit is A. 1 B. 4 C. 5 D. 7

B. 4

20. If the government wanted to use the incentive principle to discourage smoking, it would A. publicize the health risks associated with second-hand smoke. B. increase taxes on cigarettes, raising the price of a pack. C. subsidize hospitals for treating lung disease. D. invest more money in health research.

B. increase taxes on cigarettes, raising the price of a pack.

3. If one fails to account for opportunity costs in decision making, then applying the cost-benefit rule will be flawed because A. the benefits will be overstated. B. the costs will be understated. C. the benefits will be understated. D. the costs will be overstated.

B. the costs will be understated.

The following table shows the relationship between the speed of a computer's CPU and the benefits and costs. Assume that all other features of the computer are the same, i.e., CPU speed is the only source of variation. CPU Mhz/Total Benefit/Marginal Benefit/Total Cost/Marginal Cost 600 $1,000 ----- $900 ----- 700 $1,500 ----- ----- $100 800 ----- $400 $1,400 ----- 900 $2,200 ----- $1,900 ----- 1,000 $2,400 ----- ----- $600 17. The total benefit of an 800 Mhz computer is A. $400. B. $800. C. $1,900. D. $2,200.

C. $1,900.

7. You save $10 on gas every week since you live close to the bus stop. You have class five days a week. What is your average benefit per day for living close to the bus stop? A. $10 B. $5 C. $2 D. $1.43

C. $2

Units of Activity/Total Cost/Total Benefit 1 $3 $10 2 $4 $14 3 $6 $16 4 $10 $20 5 $15 $24 6 $21 $28 7 $28 $29 8. Refer to the figure above. The average cost of 5 units of activity is A. $1 B. $2 C. $3 D. $4

C. $3

2. Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is A. $7. B. $30. C. $37. D. $37 minus the benefit of seeing the movie.

C. $37.

Units of Activity/Total Cost/Total Benefit 1 $3 $10 2 $4 $14 3 $6 $16 4 $10 $20 5 $15 $24 6 $21 $28 7 $28 $29 11. Refer to the figure above. The marginal benefit of the 6th unit of activity is A. $1 B. $2 C. $4 D. $10

C. $4

6. You had to pay $600 (non-refundable) for your meal plan for the Fall semester which gives you up to 150 meals. Your average cost for a meal equals A. $6. B. $5. C. $4. D. $0.25.

C. $4.

18. What is the opportunity cost of living in a house that you already own? A. Zero, because you already own it. B. That mostly depends on current mortgage rates. C. The rent you could receive if you rented the house out to someone else. D. The taxes you pay your local government.

C. The rent you could receive if you rented the house out to someone else.

4. Pat earns $25,000 per year and has two pre-school children. Childcare for the children costs $12,000 per year. Pat has decided to stay home and take care of the children. Pat must A. value spending time with the children by more than $25,000. B. value spending time with the children by more than $12,000. C. value spending time with the children by more than $13,000. D. value spending time with the children as much than does Chris.

C. value spending time with the children by more than $13,000.

Units of Activity/Total Cost/Total Benefit 1 $3 $10 2 $4 $14 3 $6 $16 4 $10 $20 5 $15 $24 6 $21 $28 7 $28 $29 9. Refer to the figure above. The marginal cost of the 4th unit of activity is A. $1 B. $2 C. $3 D. $4

D. $4

15. If Jane works for 6 hours she can rent 12 apartments, and if she works for 7 hours she can rent 15 apartments. The marginal benefit of the 7th hour of Jane's work equals: A. 12 apartments. B. 15 apartments. C. 1 apartment. D. 3 apartments.

D. 3 apartments.

19. Which of the following decisions would not be part of microeconomics? A. How to make the largest profit. B. Whether to study or watch TV tonight. C. How an early freeze in California will affect the price of fruit. D. Whether the federal budget should always be balanced.

D. Whether the federal budget should always be balanced.

21. According to the incentive principle, A. it is irrational to perform volunteer services. B. people will always take the highest-paying job. C. benefits are more important than costs in making a decision. D. people tend to do more of something when the benefits are greater.

D. people tend to do more of something when the benefits are greater.

1. According to the cost-benefit principle, A. the lowest cost activity usually gives the lowest benefit. B. a person should always choose the activity with the lowest cost. C. a person should always choose the activity with the greatest benefit. D. the extra costs and benefits of an activity are more important considerations than the total costs and benefits.

D. the extra costs and benefits of an activity are more important considerations than the total costs and benefits.