Question 1

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 2

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 3

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 4

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

Accepted Answer

The cost-benefit model suggests that individuals make decisions based on weighing the costs and benefits of their options. This includes an intuitive assessment of the potential costs and benefits, which means that using intuition is consistent with the model. While intuition can sometimes lead to incorrect decisions, it is still a valid part of the decision-making process. Therefore, choice C is the best answer.

Question 5

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 airfares are $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 $1400. 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 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 6

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 airfares are $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 $1400. 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 airfares are $450. If you do not use the frequent-flyer coupon to fly to Miami, should you go to Miami?

Accepted Answer

The total cost of the Miami trip is $600 (airfare) + $900 (other costs) = $1500. Using the coupon for Miami saves $500, making the cost $1000. However, using the coupon for Atlanta saves $450, making the Miami trip effectively cost $1450 ($1000 + $450 opportunity cost). Since you are only willing to pay $1400, the benefit is less than the cost.

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

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 airfares are $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 $1400. 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 airfares are $450. If the Chicago-Atlanta round-trip air fare were $350, should you use the coupon to go to Miami?

Accepted Answer

Using the frequent-flyer coupon to go to Miami would bring down the cost of airfare to $100 ($600 - $500 coupon), and the total cost of the trip would be $1000 ($100 + $900). Since the most you are willing to pay for the trip is $1400, your economic surplus would be $400 ($1400 - $1000).

If the Chicago-Atlanta round-trip airfare were $350, the cost of the Atlanta trip would be $150 ($350 - $500 coupon), which is less than the cost of going to Miami. Therefore, it would be better to use the coupon for the Atlanta trip and pay full price for the Miami trip. This way, the cost of the Atlanta trip would be reduced to $150, and the cost of the Miami trip would be $1500 ($600 airfare + $900 other costs). Since this is more than the most you are willing to pay, choosing not to go to Miami would be the best choice.

Question 10

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 11

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

The total cost for talking on the phone for three hours can be calculated using the formula:

Total cost = Marginal cost of the 1st hour + Marginal cost of the 2nd hour + Marginal cost of the 3rd hour

Total cost = $50 + $75 + $105
Total cost = $230

Therefore, the best choice is C.

Question 12

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

Marginal benefit refers to the additional benefit obtained from consuming one additional unit of a good or service. In this case, the marginal benefit of watching the third baseball game would be the difference in benefit between watching two games and watching three games.

Marginal benefit of the third game = Total benefit of watching 3 games - Total benefit of watching 2 games

Marginal benefit of the third game = 125 - 120

Marginal benefit of the third game = 5

Therefore, the answer is B.

We cannot determine the best choice from the given information as we do not have any information regarding the cost of watching the games.

Question 13

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 cost of attending the concert is $35, so if you choose to go, your economic surplus is 0. If you choose to work instead, you will earn $44 (4 hours x $11/hr) but will also have a psychic cost of $8 (4 hours x $2/hr). So, your economic surplus from working is $1 ($44 - $35 - $8). Therefore, the best choice is to work and earn the extra $1.

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. 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 15

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

Accepted Answer

The definition given is that of marginal benefit, which is the additional benefit gained from one extra unit of an activity. Total benefit is the sum of all benefits gained from an activity, average benefit is the total benefit divided by the number of units, and economic benefit refers to the benefit gained from the most efficient use of resources.

Question 16

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 17

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

The benefit to Matt of driving to campus to buy the concert ticket last week was $4 (25% of $16). Therefore, it would cost him $4 more to purchase the textbooks on campus compared to buying them online with next day delivery. Therefore, the best choice for Matt is to purchase the books online for $175.

Question 18

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

To determine whether Pat should stay home with the kids, we need to compare the cost of continuing to work with the benefits of spending more time with the children. Let's break it down:

Cost of continuing to work:
- Pat's after-tax income: $25,000
- Childcare costs: $12,000
Total cost: $37,000

Benefits of staying home with the kids:
- Avoiding the $12,000 cost of childcare
- Spending more time with the children, which is difficult to quantify, but may include:
   - Improved bonding with the children
   - Reduced stress and guilt from juggling work and family responsibilities
   - Ability to participate in the children's activities and education

Since Chris does not want to stay home with the kids, we can assume that the value of Pat spending more time with the kids is greater than $12,000 (the cost of childcare), since otherwise they would just have Chris stay home. Therefore, the only relevant comparison is between the cost of continuing to work ($37,000) and the value of spending more time with the kids (which is greater than $12,000). The only answer choice that falls between those two numbers is C, $13,000 per year, so that is our answer.

Question 19

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 airfares are $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 $1400. 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 airfares are $450. What is the opportunity cost of using the coupon for the Miami trip?

Accepted Answer

The opportunity cost of using the coupon for the Miami trip is the value of the coupon that would be foregone by using it for the Miami trip instead of the Atlanta trip.

If the coupon is used for the Miami trip, the total cost of the trip would be $1100 ($600 airfare - $500 coupon + $900 other costs). If the coupon is not used for the Miami trip, the total cost of the trip would be $1400 ($600 airfare + $900 other costs).

If the coupon is saved for the Atlanta trip, the total cost of the trip would be $450 (Atlanta airfare).

Therefore, the opportunity cost of using the coupon for the Miami trip is $500 ($450 saved on the Atlanta trip - $50 saved on the Miami trip).

Since the most the individual is willing to pay for the Miami trip is $1400, and the total cost with the coupon is $1100, it is the best choice to use the coupon for the Miami trip.

Question 20

The marginal benefit of an activity is the:

Accepted Answer

The marginal benefit is the extra benefit associated with an extra unit of the activity. It is not the same as the total benefit (A), nor is it the total benefit divided by the level of the activity (B). It is specifically related to the additional unit of the activity, not the total activity (D).

Quiz 1: Thinking Like an Economist