Question 1

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:

Accepted Answer

Marginal benefit is the increase in total benefit that results from a carrying out one additional unit of an activity. By watching the 3ʳᵈ game, total benefit increases from 120 to 125, so the marginal benefit is 5.

Question 2

You paid $35 for a ticket (which is non-refundable)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.

Question 3

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school-aged 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

The benefit of staying Pat home with the kids is the $12,000 per year saved on childcare plus the value of Pat spending more time with the kids. The cost of Pat staying home with the kids is $25,000 in foregone earnings. Thus, weighing costs and benefits, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than $13,000 per year.

Question 4

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 5

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

Accepted Answer

Marginal benefit is the additional benefit of carrying out one additional unit of an activity.

Question 6

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 7

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

If he bought his textbooks at the university bookstore instead of online, Matt would save $5, but the cost of driving to campus would be $4, so his economic surplus would be $1.

Question 8

You paid $35 for a ticket (which is non-refundable)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 9

The marginal cost of an activity is the:

Accepted Answer

Marginal cost is the additional cost of carrying out an additional unit of an activity.

Question 10

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

Accepted Answer

The cost includes both implicit and out-of-pocket costs.

Question 11

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 round-trip airfare is $600, but you have a frequent-flyer 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 $1,400. Your only alternative use for your frequent-flyer 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 Chicago-Atlanta round-trip airfare is $450. Should you use the frequent flyer coupon to go to Miami?

Accepted Answer

If you use the frequent-flyer coupon to go to Miami, your out-of-pocket expenses would be $1,000, and you would give up the ability to save $450 to go to Atlanta. Thus, the total cost of using the frequent-flyer coupon to go to Miami would be $1,450, which is higher than your willingness to pay.

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

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 round-trip airfare is $600, but you have a frequent-flyer 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 $1,400. Your only alternative use for your frequent-flyer 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 Chicago-Atlanta round-trip airfare is $450. If you do not use the frequent-flyer coupon to fly to Miami, should you go to Miami?

Accepted Answer

If you don't use your frequent-flyer coupon, your total cost is $600 + $900 = $1,500, but your benefit is only $1,400.

Question 14

You paid $35 for a ticket (which is non-refundable)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 15

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 16

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 round-trip airfare is $600, but you have a frequent-flyer 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 $1,400. Your only alternative use for your frequent-flyer 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 Chicago-Atlanta round-trip airfare is $450. What is the opportunity cost of using the coupon for the Miami trip?

Accepted Answer

If you use the coupon for the Miami trip you lose the value of using it to go to Atlanta.

Question 17

You paid $35 for a ticket (which is non-refundable)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 benefit of working is 4 × ($11 - $2)or $36. The cost of working is the value you place on going to the concert or $35 (since this is the most you would have been willing to pay for a ticket). Note that we do not factor in the cost of the ticket since it's a sunk cost. Subtracting the cost of working from the benefit of working, we see that the economic surplus of working is $1.

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 round-trip airfare is $600, but you have a frequent-flyer 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 $1,400. Your only alternative use for your frequent-flyer 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 Chicago-Atlanta round-trip airfare is $450. If the Chicago-Atlanta round-trip air fare were $350, should you use the coupon to go to Miami?

Accepted Answer

If you use the frequent-flyer coupon to go to Miami, your out-of-pocket expenses would be $1,000 and the opportunity cost of using the coupon would be $350. Thus, the total cost of using the frequent-flyer coupon to go to Miami would be $1,350, which is $50 less than your willingness to pay.

Question 19

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

Accepted Answer

People weigh costs and benefits, even if they are not consciously aware that they are doing so.

Question 20

The marginal benefit of an activity is the:

Accepted Answer

Marginal benefit is the increase in total benefit that results from carrying out one additional unit of an activity.

Quiz 1: Thinking Like an Economist