ECON CH 8

You just spent $80 on a new movie for your collection. You would have preferred the director's cut but discovered when you got home that you bought the theatrical version. The store you bought the movie from has an "all sales final" policy, but you could resell the movie online for $60. The director's cut sells for $100. By how much would you need to value the director's cut over the theatrical version for it to make sense for you to sell the version you bought and buy the director's cut?

$40 The opportunity cost of the director's cut is $40. The $80 cost of the theatrical version has already been spent, but you can recoup $60 of that cost, so only $20 is sunk. Therefore, the opportunity cost of the director's cut is $100 − $60 = $40. You would have to value the director's cut by at least $40 more than the other version.

You would like to save more money. Which of the following strategies will help you overcome time-inconsistency -Deciding how much you need to save -Setting up a savings account -Enrolling in an automatic transfer program that will move a specified amount of money from your checking account to your savings account each month. -Putting reminders in your calendar to make deposits

Enrolling in an automatic transfer program that will move your specified amount of money from your checking account to your savings account each month. --None of the other choices will override your oriented self who prefers spending over saving.

Isaiah received a gift certificate that covers three salsa dance lessons. After the first lesson, Isaiah decided that he doesn't like salsa, yet he still plans to go the next lesson because it doesn't cost him anything. Which of the following statements is correct about Isaiah's logic: -Isaiah is undervaluing the opportunity cost of his time -Isaiah will definitely enjoy the next two classes more than the first one. -Isaiah is undervaluing the monetary cost of his gift certificate -Isaiah has no opportunity cost when taking the next two classes

Isaiah is undervaluing the opportunity cost of his time. Taking the dance lessons wastes his time as he is not enjoying it.

Alda is currently willing to pay $2,000 to visit her favorite cousin over spring break. A month ago, she booked a trip costing $1,200. Spring break has arrived, but Alda needs one day to finish an important paper before she goes on her trip. Alda could now cancel her trip and get a refund of $800. Or, she could pay an additional $1,000 to rebook the trip for two days later. Alda's correct opportunity cost of going to see her cousin is $____, and so Alda _____ go see her cousin.

Opp cost: $1800 This is because $400 is sunk cost so it doesn't matter. $800 is a potential refund that Alda would have gieven up, and the $1000 is the money she would spend to rebook. Alda is willing to pay $2000 so she should go (18000<2000)

During a holiday party at work, you pay $2 to buy a raffle ticket for a 128 gigabyte iPad. You win the drawing. Based on a little research online, you discover that the going rate for a hardly used 128 gigabyte iPad is $250. -What was the opportunity cost of acquiring the iPad? -What is the opportunity cost of choosing to keep the iPad?

The opportunity cost of acquiring the iPad was the $2 that you spent on the raffle ticket. b. The opportunity cost of choosing to keep the iPad is $250.

Suppose you're bowling with friends. You've already played one game and are trying to decide whether to play another. Each game costs $8 per person, plus a one-time rental fee of $5 for the bowling shoes. It would take another hour to play the next game, which would make you late to work. Missing an hour of work would mean that you would lose pay at a rate of $14 per hour. Based on this information, how much would you have to enjoy the next bowling game, expressed in terms of dollars, to play another game?

You would have to place a value on your enjoyment of the next game by at least $22. This game will cost you $8 (the shoe rental is paid and is now a sunk cost) plus the $14 you will not earn by missing that hour of work.

You are saving for a trip to Europe. You have an existing savings account that earns 3 percent annual interest and has a current balance of $4,000. You don't want to use your current savings for vacation, so you decide to borrow the $1,500 you need for travel expenses. You will repay the loan in exactly one year. The annual interest rate is 5 percent. a. If you were to withdraw the $1500 from your savings account to finance the trip, how much interest would you forgo b. If you borrow the $1500 how much will you pay in interest c. How much does the trip cost you if you borrow rather than dip into your savings

a. Interest forgone = $1,500 × 0.03 = $45. b. Interest expense = $1,500 × 0.05 = $75. c. Principle plus net interest = $1,500 + $75 - $45 = $1,530.

You have a friend who is always resolving to improve his grades, but who never seems to find time to study. Which of the following suggestions could help him overcome his time inconsistency and help him meet his goal. -Make firm time commitments to meet with a study partner who depends on him showing up -Set aside a sum of money that he will only be allowed to spend if he achieves the desired grade for the class -Utilize a tutor who charges a fee (or higher fee) if he misses an appointment -Rewarding himself with some type of treat only after he has studied.

1,3

You're seated at a banquet that is beginning to become boring. Which of the following pieces of information are relevant to your decision to stay or go somewhere else? -Another party is happening at the same time, and you've heard that it's fun -You paid $30 to attend a banquet -The other party has a cover charge of $10 -You haven't eaten dessert yet, and it looks delicious -The dinner you were served was only so-so

1,3,4 Sunk costs do not matter. Weighing costs and benefits.

For which of the following would be an example of being time inconsistent? -Setting up a monthly contribution to your 401k or IRA that is automatically taken out of your paycheck, regardless of overall amount of that months paycheck -Buying textbook and connect web access to an economic class, but then choosing to socialize instead of doing assignments -Making a New year's resolution to exercise more and therefore joining a gym, but then deciding that you are too busy to take the time to go -Deciding after an economic class that you want to save enough money for retirement so that you can stop working at the age of 65, but still being unable to save anything due to high levels of current spending.

2,3,4

In which of the following cases is time inconsistency likely to be at work? -A parent plans to enroll his child in art class but enrolls her in dance class instead -A beginning piano player plans to practice three times a week but frequently practices only once a week -A child plans to become a doctor when she grows up, but a month later reads a book about park rangers and decides to become a park ranger instead. -A student keeps intending to finish reading War and Peace---next week.

2,4 It is not time inconsistent to simply change your mind.