Question 1

You paid $35 for a ticket (which is non­refundable) to see SPAM, a local rock band, in concert on Saturday.Assume that $35 is the most you would have been willing to pay for a ticket.Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert.You would have to work 4 hours and she would pay you $11/hr.The psychic cost to you of working is $2/hr.Your economic surplus from going to work instead of seeing SPAM on Saturday is:

Accepted Answer

The economic surplus is calculated by subtracting the cost of an activity from its benefit. 
The benefit of attending the concert is $35 (the maximum you were willing to pay for the ticket). 
The cost of attending the concert is $35 (the price of the ticket). 
Therefore, the economic surplus of attending the concert is $0. 
If you work instead, you earn $44 ($11/hour x 4 hours) but the psychic cost of working is $8 ($2/hour x 4 hours). 
Therefore, the economic surplus of working is $36 ($44 - $8). 
Since the economic surplus of working is greater than the economic surplus of attending the concert, the best choice is to work instead of attending the concert. Thus, the answer is B.

Question 2

You paid $35 for a ticket (which is non­refundable) to see SPAM, a local rock band, in concert on Saturday.Assume that $35 is the most you would have been willing to pay for a ticket.Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert.You would have to work 4 hours and she would pay you $11/hr.The psychic cost to you of working is $2/hr.What is the opportunity cost of going to the concert?

Accepted Answer

The cost of going to the concert is the foregone value of working, which is 4 × ($11 - $2)or $36. [Note that we do not factor in the cost of the ticket since it's a sunk cost.]

Question 3

Matt has decided to purchase his textbooks for the semester.His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170.Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.Assume the minimum that Matt would be willing to accept to drive to campus is equal to the $4 he saved on the concert ticket.What would his economic surplus be if he bought his textbooks at the university bookstore rather than online?

Accepted Answer

To calculate Matt's economic surplus, we need to compare the cost of his two options and subtract the minimum amount he would be willing to accept to drive to campus.
Option 1: Online purchase with next day delivery for $175
Option 2: Purchase at university bookstore for $170
Minimum amount Matt is willing to accept to drive to campus: $4 (equivalent to the discount he received on his concert ticket)
Comparing Option 1 and Option 2, Matt would save $5 by purchasing the textbooks at the university bookstore ($175 - $170 = $5). Since his minimum acceptable amount to drive to campus is $4, his economic surplus would be $1 ($5 - $4 = $1). Therefore, the best choice for Matt is to buy the textbooks at the university bookstore since he would have a positive economic surplus.

Question 4

Suppose the marginal cost of the 1^st hour of talking on the phone is $50, the marginal cost of the 2^nd hour is $75, and the marginal cost of the 3^rd hour is $105.In this case, the total cost of talking on the phone for 3 hours is:

Accepted Answer

To find the total cost of talking on the phone for 3 hours, we need to add up the marginal costs of each hour.

1st hour: $50 
2nd hour: $75 
3rd hour: $105

Total cost = $50 + $75 + $105 = $230. Therefore, the answer is C.

Question 5

The marginal benefit of an activity is the:

Accepted Answer

Marginal benefit refers to the extra benefit received from an extra unit of an activity. Therefore, it is not the same as the total benefit (A), nor is it the total benefit divided by the level of activity (B). Instead, it is specifically related to the extra unit.

Question 6

Suppose the total benefit of watching 1 baseball game is 100, the total benefit of watching 2 games is 120, and the total benefit of watching 3 games is 125.In this case, the marginal benefit of watching the 3^rd game is:

Accepted Answer

The marginal benefit of watching the 3rd game is the difference in total benefit between watching 3 games and watching 2 games, which is 125-120=5. Therefore, the correct answer is B.

As for the best choice, it depends on the individual's preferences and circumstances. However, based on the information given, the marginal benefit of watching the third game is relatively small compared to the first two games, which suggests diminishing marginal utility. Therefore, it may not be the best choice to watch the third game if the opportunity cost (e.g. time, money, etc.) outweighs the marginal benefit.

Question 7

The extra benefit that results from carrying out one additional unit of an activity is the ______ of the activity.

Accepted Answer

The concept of "marginal" refers to the additional or incremental benefit or cost associated with a particular action. Therefore, the extra benefit resulting from one additional unit of an activity is the marginal benefit. Choices B, C, and D refer to overall or average benefits, but they do not capture the incremental increase in benefit that comes from doing one more unit of the activity.

Question 8

You paid $35 for a ticket (which is non­refundable) to see SPAM, a local rock band, in concert on Saturday.Assume that $35 is the most you would have been willing to pay for a ticket.Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert.You would have to work 4 hours and she would pay you $11/hr.The psychic cost to you of working is $2/hr.What is your opportunity cost of going to work on Saturday?

Accepted Answer

By going to work, you give up attending the concert, which you value at $35.

Question 9

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them.The round­trip airfares are $600, but you have a frequent­flyer coupon worth $500 that you could use to pay part of the airfare.All other costs for the vacation are exactly $900.The most you would be willing to pay for the trip is $1400.Your only alternative use for your frequent­flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend.The Chicago­Atlanta round­trip airfares are $450.What is the opportunity cost of using the coupon for the Miami trip?

Accepted Answer

The opportunity cost of using the frequent-flyer coupon for the Miami trip is the value of what you would be giving up by using it for this purpose - which is the value of what you could have used it for if you didn't use it for the Miami trip. In this case, if you don't use the coupon for the Miami trip, you could use it for the Atlanta trip, which would save you $500 on the $450 round-trip airfare. Therefore, the opportunity cost of using the coupon for the Miami trip is $500.
The total cost of the Miami trip would be $600 (airfare) - $500 (coupon) + $900 (other costs) = $1000. This is less than the maximum you are willing to pay, so you could potentially go on the trip. However, since the opportunity cost of using the coupon for the Miami trip is $500, and the most you are willing to pay for the trip is $1400, it would be more financially advantageous to use the coupon for the Atlanta trip and pay for the full airfare for the Miami trip. Therefore, the best choice would be:
Choice: Do not use the frequent-flyer coupon for the Miami trip, and pay the full $600 for round-trip airfare. Use the coupon for the Atlanta trip, saving $500 on the $450 airfare.
 This choice maximizes the value of the frequent-flyer coupon and saves you the most money overall.

Question 10

Moe has a big exam tomorrow.He considered studying this evening, but decided to hang out with Curly instead.If neither activity involves any explicit costs, and Moe always chooses rationally, it must be true that:

Accepted Answer

If Moe rationally chooses to spend time with Curly, then his benefit of spending time with Curly must outweigh his cost. Given that neither activity involves any explicit costs, the opportunity cost of spending time with Curly equals the benefit of studying. Thus, if Moe rationally chooses to spend time with Curly, it must be the case that his benefit from spending time with Curly is greater than his benefit from studying.

Question 11

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes).They have two pre­school­aged children.Childcare for their children costs $12,000 per year.Given that Chris doesn't want to stay home with the kids, regardless of what Pat does, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than:

Accepted Answer

In order to decide whether it is financially beneficial for Pat to stay home with the children, we need to compare the total household income with Pat working and with Pat staying home.

If Pat works, the household income is $25,000 + $35,000 = $60,000. After subtracting the cost of childcare, the household has $48,000 left over.

If Pat stays home, the household income is only $35,000. This means that staying home with the kids costs the household $13,000 ($48,000 - $35,000).

Therefore, the value of Pat spending more time with the kids must be greater than $13,000 per year in order for it to make financial sense for Pat to stay home.

Choice C is the only answer that falls in line with this conclusion, as it is the only option that is less than $13,000 per year.

Question 12

Matt has decided to purchase his textbooks for the semester.His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170.Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.Given that driving to campus to buy the concert ticket was rational for Matt, Matt should:

Accepted Answer

Because Matt was willing to drive to campus to save $4 last week, we can assume that the cost of driving to campus is no more than $4, so he should be willing to drive to campus to save $5.

Question 13

The fact that most people make some decisions based on intuition rather than calculation is:

Accepted Answer

The cost-benefit model assumes that individuals consciously weigh the costs and benefits of their actions before making a decision. However, in reality, many people may use intuition as a way of instinctively weighing the costs and benefits without consciously doing so. Therefore, choosing an option that acknowledges that people intuitively weigh costs and benefits is the most accurate.

Question 14

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them.The round­trip airfares are $600, but you have a frequent­flyer coupon worth $500 that you could use to pay part of the airfare.All other costs for the vacation are exactly $900.The most you would be willing to pay for the trip is $1400.Your only alternative use for your frequent­flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend.The Chicago­Atlanta round­trip airfares are $450.If you do not use the frequent­flyer coupon to fly to Miami, should you go to Miami?

Accepted Answer

The answer of Your classmates from the University of Chicago...

Question 15

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

Accepted Answer

Implicit costs are opportunity costs that are not directly paid out of pocket. If they are not accounted for, the total costs will be understated, leading to flawed decision-making.

Question 16

Matt has decided to purchase his textbooks for the semester.His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170.Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.The benefit to Matt of buying his books at the university bookstore instead of online is:

Accepted Answer

Matt saves $5 by purchasing the books at the university bookstore.

Question 17

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them.The round­trip airfares are $600, but you have a frequent­flyer coupon worth $500 that you could use to pay part of the airfare.All other costs for the vacation are exactly $900.The most you would be willing to pay for the trip is $1400.Your only alternative use for your frequent­flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend.The Chicago­Atlanta round­trip airfares are $450.Should you use the frequent flyer coupon to go to Miami?

Accepted Answer

The answer of Your classmates from the University of Chicago...

Question 18

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them.The round­trip airfares are $600, but you have a frequent­flyer coupon worth $500 that you could use to pay part of the airfare.All other costs for the vacation are exactly $900.The most you would be willing to pay for the trip is $1400.Your only alternative use for your frequent­flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend.The Chicago­Atlanta round­trip airfares are $450.If the Chicago­Atlanta round­trip air fare were $350, should you use the coupon to go to Miami?

Accepted Answer

To determine whether using the frequent-flyer coupon for Miami is economically beneficial, we need to calculate the economic surplus for each option.

Option 1: Use coupon for Miami
Total cost for Miami trip = $600 (airfare) - $500 (coupon) + $900 (other costs) = $1000
Economic surplus = $1400 (maximum willingness to pay) - $1000 (total cost) = $400

Option 2: Save coupon for Atlanta
Total cost for Atlanta trip = $450
Economic surplus = $0 (you have to make the trip for your sister's graduation)

Since the economic surplus for Option 1 is positive ($400) and greater than the surplus for Option 2 (which is $0), it is economically beneficial to use the frequent-flyer coupon for the Miami trip.

However, if the Chicago-Atlanta round-trip airfare were $350, the economic surplus for Option 2 would change:
Total cost for Atlanta trip = $350
Economic surplus = $50 (maximum willingness to pay of $1400 minus total cost of $350)

In this case, the economic surplus for Option 2 ($50) is greater than the surplus for Option 1 ($0), so it would be economically beneficial to save the coupon for the Atlanta trip instead of using it for the Miami trip.

Question 19

Matt has decided to purchase his textbooks for the semester.His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170.Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.The benefit to Matt of driving to campus to buy the concert ticket last week was:

Accepted Answer

Matt saved $4 (25% of $16)by driving to campus to buy the ticket.

Question 20

You paid $35 for a ticket (which is non­refundable) to see SPAM, a local rock band, in concert on Saturday.Assume that $35 is the most you would have been willing to pay for a ticket.Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert.You would have to work 4 hours and she would pay you $11/hr.The psychic cost to you of working is $2/hr.Should you go to the concert instead of working Saturday?

Accepted Answer

The fact that you were willing to pay up to $35 to go to the concert indicates that the benefit to you of going to the concert is $35. The cost of going to the concert is the foregone value of working, which is 4 × ($11 - $2)or $36. [Note that we do not factor in the cost of the ticket since it's a sunk cost.] Since the benefit of going to the concert is less than the cost, you should not go to the concert.

Quiz 1: Thinking Like an Economist

Suppose the marginal cost of the 1^st hour of talking on the phone is $50, the marginal cost of the 2^nd hour is $75, and the marginal cost of the 3^rd hour is $105.In this case, the total cost of talking on the phone for 3 hours is:

The marginal benefit of an activity is the:

Suppose the total benefit of watching 1 baseball game is 100, the total benefit of watching 2 games is 120, and the total benefit of watching 3 games is 125.In this case, the marginal benefit of watching the 3^rd game is:

The extra benefit that results from carrying out one additional unit of an activity is the ______ of the activity.

Moe has a big exam tomorrow.He considered studying this evening, but decided to hang out with Curly instead.If neither activity involves any explicit costs, and Moe always chooses rationally, it must be true that:

The fact that most people make some decisions based on intuition rather than calculation is:

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

Quiz 1: Thinking Like an Economist

Suppose the marginal cost of the 1st hour of talking on the phone is $50, the marginal cost of the 2nd hour is $75, and the marginal cost of the 3rd hour is $105.In this case, the total cost of talking on the phone for 3 hours is:

The marginal benefit of an activity is the:

Suppose the total benefit of watching 1 baseball game is 100, the total benefit of watching 2 games is 120, and the total benefit of watching 3 games is 125.In this case, the marginal benefit of watching the 3rd game is:

The extra benefit that results from carrying out one additional unit of an activity is the ______ of the activity.

Moe has a big exam tomorrow.He considered studying this evening, but decided to hang out with Curly instead.If neither activity involves any explicit costs, and Moe always chooses rationally, it must be true that:

The fact that most people make some decisions based on intuition rather than calculation is:

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

Suppose the marginal cost of the 1^st hour of talking on the phone is $50, the marginal cost of the 2^nd hour is $75, and the marginal cost of the 3^rd hour is $105.In this case, the total cost of talking on the phone for 3 hours is:

Suppose the total benefit of watching 1 baseball game is 100, the total benefit of watching 2 games is 120, and the total benefit of watching 3 games is 125.In this case, the marginal benefit of watching the 3^rd game is:

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