Question 1

Assume that an individual has to choose between two options,buying a cell phone or buying an iPad.The expected cost of buying a phone is $700 and the expected benefit is $900.The expected cost of buying an iPad is $300 and the expected benefit is $600.How does the individual arrive at the optimal choice if he implements:
a)optimization using total value?
b)optimization using marginal analysis?

Accepted Answer

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Question 2

What are the two techniques of achieving optimization? How do the techniques differ?

Accepted Answer

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Question 3

If the net benefit of Project A is $20 and that of Project B is $15,switching from Project A to Project B ________.

Accepted Answer

Switching from Project A to Project B would reduce the net benefit by $5 because the net benefit of Project A ($20) is higher than that of Project B ($15). Therefore, if we switch from Project A to Project B, we would be choosing the project with a lower net benefit, resulting in a reduction of $5.

Question 4

To carry out an optimization analysis,________.

Accepted Answer

To carry out an optimization analysis, all costs should be converted to the same unit of measurement in order to make them comparable and to accurately measure the impact of different strategies on the overall cost. This process is often referred to as cost normalization.

Question 5

What are the steps involved in optimization using total value? If option A has a cost of $5 and provides a benefit of $8 and option B has a cost of $10 and provides a benefit of $15,which of the two projects is optimal?

Accepted Answer

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Question 6

If Project A has a cost of $5 and provides a benefit of $10,and Project B has a cost of $2 and provides a benefit of $4,then switching from Project A to Project B ________.

Accepted Answer

Calculating the net benefit of Project A, we get $10 - $5 = $5. 
Calculating the net benefit of Project B, we get $4 - $2 = $2. 
Therefore, switching from Project A to Project B would decrease the net benefit by $3 ($5 - $2 = $3).

Question 7

If the opportunity cost of time is $20 per hour and an individual spends 20 hours in commuting every month,the opportunity cost of his commute is ________.

Accepted Answer

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Question 8

If Project X has a cost of $6 and provides a benefit of $10 and Project Y has a cost of $25 and provides a benefit of $27,which of the following statements is true?

Accepted Answer

Project X has a net benefit of $4 ($10 - $6), and Project Y has a net benefit of $2 ($27 - $25). Therefore, choosing Project X, which has the higher net benefit, is the optimal choice.

Question 9

If the net benefit of Project A is $10 and that of Project B is $12,which of the following statements is true?

Accepted Answer

Project B has a higher net benefit than Project A, so an individual can optimize by choosing Project B over Project A.

Question 10

If the opportunity cost of time is ________ and an individual spends ________ commuting every month,the opportunity cost of her commute is $100 every month.

Accepted Answer

The opportunity cost of time is the value of the time spent on an alternative activity. If the opportunity cost is $10 per hour and the individual spends 10 hours commuting, then the total opportunity cost is $10/hour * 10 hours = $100.

Question 11

An individual pays $100 every month as rent for an apartment,and his monthly opportunity cost of commuting from the apartment to his place of work is $40.Which of the following statements is then true?

Accepted Answer

The direct cost refers to the actual expense paid out of pocket, which in this case is the rent of $100 per month. The indirect cost refers to the opportunity cost, which is the cost of the next best alternative forgone, in this case, the cost of commuting to work ($40). Therefore, the direct cost of renting the apartment is $100, whereas the indirect cost is $40.

Question 12

Among a set of alternatives with the same benefits,an individual is said to optimize if she chooses an alternative that ________.

Accepted Answer

Choosing the alternative with the lowest total cost among options with the same benefits is considered optimizing because it maximizes the net benefit or utility derived from the choice.

Question 13

What is meant by the term "optimization?" What do economists usually believe about how individuals optimize?

Accepted Answer

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Question 14

Scenario: Ryan wants to rent an apartment. The following table shows the monthly rent of five apartments and the number of hours per month it takes to commute to work from each apartment. Ryan's opportunity cost of time is $15 per hour.
 
-Refer to the scenario above.What is the total cost incurred per month if Ryan rents Apartment 3?

Accepted Answer

The total cost incurred per month for Ryan renting Apartment 3 is $2,150.

Question 15

In most cases,optimization using marginal analysis is faster and easier than optimization using total value because the former ________.

Accepted Answer

Marginal analysis focuses on the incremental changes or differences between options rather than considering the total values, making it faster and easier by ignoring commonalities and concentrating on key differences.

Question 16

If Project A has a cost of $2 and provides a benefit of $3 and Project B has a cost of $5 and provides a benefit of $8,which of the following statements is true?

Accepted Answer

Project B has a higher net benefit than Project A since it provides $3 of benefit per dollar spent compared to Project A which provides only $1.50 of benefit per dollar spent. Therefore, an individual can optimize their decision by choosing Project B. Option A is incorrect because the net benefit of Project A is $1 ($3 benefit - $2 cost). Option C is incorrect since the net benefit of Project B is higher than Project A. Option D is incorrect because the shift from Project A to Project B increases the net benefit by $3 ($8 benefit - $5 cost) and not by $1.

Question 17

If an individual's opportunity cost of commute is $300 per month and his monthly commuting time is 60 hours,his opportunity cost of time is ________.

Accepted Answer

The opportunity cost of time is calculated by dividing the total opportunity cost by the total time. Here, $300 / 60 hours = $5 per hour.

Question 18

How does optimization using total value differ from optimization using marginal analysis? Assume that the city council has to choose one of the following three alternatives-setting up a school,setting up a hospital,and setting up a playground.The estimates of the expected cost and benefit of all three projects are shown in the following table.How does the city council arrive at the optimal choice if both the techniques of optimization are implemented? Do the results vary?

Accepted Answer

The answer of How does optimization using total value differ...

Question 19

Among a set of alternatives with the same total costs,an individual is said to optimize if she chooses an alternative that has the ________.

Accepted Answer

If the alternatives have the same total costs, the individual will optimize by choosing the alternative with the highest total benefit, as this maximizes the overall utility or satisfaction received from the choice. Choosing alternatives with higher risk, higher opportunity costs, or higher net costs would not lead to optimization as these factors diminish the overall value or benefit received.

Question 20

Scenario: Ryan wants to rent an apartment. The following table shows the monthly rent of five apartments and the number of hours per month it takes to commute to work from each apartment. Ryan's opportunity cost of time is $15 per hour.
 
-Refer to the scenario above.What is the total cost incurred per month if Ryan rents Apartment 5?

Accepted Answer

To calculate the total cost incurred per month, we need to consider the rent of Apartment 5 and the opportunity cost of time for the commuting hours. 
Rent of Apartment 5: $1,800
Number of commuting hours per month for Apartment 5: 40
Opportunity cost of time per hour: $15
Total cost of commuting for Apartment 5: 40 x $15 = $600
Total cost incurred per month for Apartment 5: $1,800 + $600 = $2,400
Therefore, the correct answer is D.

Quiz 3: Optimization: Doing the Best You Can