ECON-2102 Chapter 1 Study Guide

the marginal benefit of an activity is the

extra benefit associated with an extra unit of the activity.

In general, rational decision making requires one to choose the actions that yield the

largest economic surplus

Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city changes to a "tag" system. Each can of garbage to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city?

Under the "tag" system, the total quantity of garbage collected in the city will decrease

Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. The implicit cost of going to the beach is:

the movie she missed seeing.

The implicit cost of an activity is the value of

the next-best alternative forgone.

Economic surplus is

the difference between the benefit gained and the cost incurred of taking an action.

If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105, then the total costs are

$50, $125, and $230.

If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125, then the marginal benefits are

100, 20, and 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. The total cost of a 700 Mhz computer is

1000

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. The total benefit of an 800 Mhz computer is

1900

To earn extra money in the summer, you grow tomatoes and sell them at a local farmers' market for $0.15 per pound. By adding compost to your garden, you can increase your yield as shown in the accompanying table. If compost costs $0.50 per pound and your goal is to make as much profit as possible, how many pounds of compost should you add?

20, 3.00 5, 0.75 3, 0.45 2, 0.30 1, 0.15 0.5, 0.08 2 pounds of compost

To earn extra money in the summer, you grow tomatoes and sell them at a local farmers' market for $0.30 per pound. By adding compost to your garden, you can increase your yield as shown in the accompanying table. If compost costs $0.30 per pound and your goal is to make as much profit as possible, how many pounds of compost should you add?

20, 6.00 5, 1.50 3, 0.90 2, 0.60 1, 0.30 0.5, 0.15 5 pounds of compost

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. The marginal cost of upgrading from a 700 to an 800 Mhz computer is

400

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. The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is

500

Kenya is a mushroom farmer. She invests all her spare cash in additional mushrooms, which grow on otherwise useless land behind her barn. The mushrooms triple in weight during their first year, after which time they are harvested and sold at a constant price per pound. Kenya's friend Fatima asks Kenya for a loan of $300, which she promises to repay after 1 year. How much interest will Fatima have to pay Kenya in order for Kenya to recover her opportunity cost of making the loan? Interest to be paid to Kenya:

600

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. Application of the cost-benefit principle would lead one to purchase a __________ computer because __________.

800 Mhz; the marginal benefits and marginal costs are equal

Identify which of the following scenarios illustrate the Scarcity Principle. A middle-class family trying to decide if they can go to Florida on vacation this year. New parents trying to decide if one of them should quit their job to stay at home. A single mother considering a second job to pay for her children's education. Members of the U.S. Congress negotiating next year's budget.

All of them

Once a week, Smith purchases a six-pack of cola and puts it in his refrigerator for his two children. He invariably discovers that all six cans are gone on the first day. Jones also purchases a six-pack of cola once a week for his two children, but unlike Smith, he tells them that each may drink no more than three cans. If the children use cost-benefit analysis each time they decide whether to drink a can of cola, Explain why the cola lasts much longer at Jones's house than at Smith's.

Each Smith child has a higher marginal cost of not drinking a cola.

The meal plan at University A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays $2 for each additional pound; if the student eats less, he or she gets a $2 per pound refund. If students are rational, at which university will average food consumption be higher?

University A

A landowner has just acquired 380 acres of new land, and is using the Cost-Benefit Principle to decide between three alternative uses for the land: growing corn, growing soybeans, or renting it to a local farmer. If corn is planted, the landowner expects to earn $830 per acre, while soybeans pay only $550 per acre. Renting the land earns the landowner $300 per acre. In addition, the explicit (or payment) cost of growing and harvesting corn is estimated to be $209,000, while only $91,200 for soybeans. We can assume there are no explicit costs associated with renting the land. a. For this landowner, the implicit cost of growing corn is $____ from ____ b. The implicit cost of growing soybeans is $_____ from ____ c. The landowner maximizes economic surplus by growing ____

a. 117800 from growing soybeans b. 114000 from renting the land c. growing soybeans

Next Friday, you plan to sell cakes at a bake sale to raise money for your school. You plan to charge $30 per cake, and you anticipate that you will sell 10 cakes. You can either purchase cakes to sell or bake them yourself. If you purchase the cakes, they will cost $15 each. If you bake your own cakes, your cost depends upon the number of cakes you bake, as shown in the table below. 0 0 1 10 2 22 3 36 4 52 5 70 6 90 7 112 8 136 9 162 10 190 a. How many cakes should you bake? How many cakes should you purchase? b. Given your answer to part a, how much in total will the 10 cakes cost you? c. How much would it have cost you to bake all 10 cakes? d. How much would it have cost you to purchase all 10 cakes?

a. 3 and 7 b. 141 c. 190 d. 150

Kamryn is deciding between three potential activities on Saturday evening: 1) Staying at home and watching her favorite television show, an activity that she values at $22 and that entails no out-of-pocket costs. 2) Going to the movies with her sister to see the latest blockbuster action film, an activity she values at $38 and that entails $19 in out-of-pocket costs. 3) Going out to dinner with her best friend, an activity she values at $40 and that entails $20 in out-of-pocket costs. a. Which activity should Kamryn choose? b. What is Kamryn's total cost (both implicit and out-of-pocket) of going to the movies? c. Relative to her next best alternative, what is Kamryn's economic surplus from going to the movies?

a. Staying at home and watching her favorite show. b. 41 c. -3

Martha and Sarah have the same preferences and incomes. Just as Martha arrived at the theater to see a play, she discovered that she had lost the $10 ticket she had purchased earlier. Sarah also just arrived at the theater planning to buy a ticket to see the same play when she discovered that she had lost a $10 bill from her wallet. If both Martha and Sarah are rational and both still have enough money to pay for a ticket, is one of them more likely than the other to go ahead and see the play anyway?

both would make the same decision.

the marginal cost of an activity is the

change in the cost of the activity that results from an extra unit of the activity.

If one fails to account for implicit costs in decision making, then applying the cost-benefit rule will be flawed because

the costs will be understated.