Econ Ch 3
Suppose your firm has a marginal revenue given by the equation MR = 10 − Q, where Q is the quantity produced and sold. This means that the seventh unit of output brings in 10 − 7 = $3 of additional revenue. The marginal cost for your firm is given by the equation MC = 2 + Q. This means that the seventh unit of output increases the marginal cost by 2 + 7 = $9.
If the firm produces the seventh unit of output, marginal cost will be greater than marginal revenue.
Which of the following statements regarding marginal analysis is true?
If total cost is rising, marginal cost could be falling.
Suppose there are four products that Samuel can purchase. Samuel obtains a discount on each of the products. The total benefit obtained by Samuel through discounts is calculated by finding out the difference in the actual price of the product and the discounted price of the product. This is shown on the Y axis of the graph. The X axis of the graph represents the products which Samuel can purchase.
In this case, Samuel will purchase product 22 as an optimal product.
Which of the following statements regarding the principle of optimization is true?
It is the unifying principle that connects various seemingly unrelated decisions. It takes into account and evaluates multiple trade-offs.
Assume that the average price for a 2,000-square-foot house in the city is $390,000 and the average rent for a 2,000-square-foot apartment in the city is $1,200 per month. Also assume that the average price for a 2,000-square-foot house in the suburbs is $210,000, 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 $450,000. 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?
Living in the city changes home prices by $180000
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.
You are considering renting a city apartment with 1,000 square feet for $1,700 per month. The monthly rent on a larger, 1,500-square-foot city apartment is $2,250. The marginal cost of renting an apartment with 500 additional square feet is ______ per square foot per month.
$1.1
Suppose your total benefits of renting x DVD's next month is: −x2+10x+30 The cost of renting a DVD is $2, and so the total cost of renting x DVD's is $2x.
0 30 1 37 2 42 3 45 4 46 5 45 6 42 7 37 8 30 Your net benefit is maximized at 4 DVDs.
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
Suppose apartments are in four locations: Location A, Location B, Location C, and Location D. Location A is in the city, where your job is. Location B is 10 minutes farther from your job than Location A. Location C is 10 minutes farther from your job than Location B, and Location D is 10 minutes farther than Location C. In turn, similar apartments in Location B rent for $165 less per month than apartments in Location A, apartments in Location C rent for $165 less than in Location B, and apartments in Location D rent for $165 less than in Location C. Suppose the value of your time is $24 per hour and you work 21 days per month, with each day requiring a round-trip commute from your apartment to work.
For simplicity, assume rent and the opportunity cost of your time commuting to work are the only factors influencing the location in which to rent an apartment. You should rent an apartment in Location A. Suppose you currently rent an apartment in Location C. By moving to optimize, you change your net benefit by $6.
Why should you have anticipated your answer to (c)?
Optimization in levels and in differences always yield the same answer.
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.
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.
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.
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 $40, while golf has value to you equal to $105. Tennis courts are publicly available at no cost, but golf costs $50 per round. Suppose your wage from working is $12 per hour.
The net benefit from playing tennis is $16 and the net benefit from playing golf is $7. Therefore, you should play tennis.
You have been invited to play a 4-hour round of golf that has a value to you of $60. The total price to play the round of golf is $45.
The net benefit of the round of golf is $15. Now assume that you have a job that pays you $8 per hour. Would you be optimizing to accept the invitation to play golf? To optimize, you should not play golf.
In which of the following situations is optimization a good description of behavior?
Tia is a very fun loving person. She chooses to go on a vacation with friends instead of volunteering at NGO as a vacation is more enjoyable.
You are a professor of economics at a university. You've been offered the position of serving as department head, which comes with an annual salary that is $6,500 higher than your current salary. However, the position will require you to work 200 additional hours per year. Suppose the next best use of your time is spending it with your family, which has value of $20 per hour.
What is the difference in the net benefit from becoming the department head? The change in net benefit is $2500. To optimize, you should become a department head.
In which of the following cases, will the profit of the firm be maximized?
When the marginal cost of producing an additional unit equals the marginal revenue from that unit The profit-maximizing level of output is 4 units.
Now suppose that you have a summer job that pays you $15 per hour. How would your analysis change?
With a $15-per-hour summer job, the opportunity cost of your time would increase.
Economists mostly use optimization in differences, as opposed to optimization in levels, because ____________.
comparing different features of alternatives is simple.
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.
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. You and Jim would need to consider ___________.
the direct costs and the indirect opportunity cost of your time required to shop.
Scott loves to go to baseball games, especially home games of the Cincinnatti Reds. All else equal, he likes to sit close to the field. He also likes to get to the stadium early to watch batting practice. The closer he parks to the stadium the more batting practice he is able to watch (the garages all open simultaneously).
Scott's optimal seat type is Club Seating. Scott's optimal parking is East river parking
Does the principle of optimization imply that people always make the best choices?
Yes, it is a good approximation for the decisions people make.