256: ECON Intermediate Microeconomics
Short Assignment: 1
Fall 2010
1. (Textbook Problem Question 1) Chris has a flexible summer job. He works every day but is allowed to take a day off anytime he wants. Of course, if he takes a day off, he doesnt get paid. His friend Don suggests they take off work on Tuesday and go to the local Six Flags amusement park. The admission charge for the amusement park is $15 per person, and it will cost them $4 each for gasoline and parking. Chris loves amusement parks and a day at the park is worth $45. However, Chris also enjoys his job so much that he would actually be willing to pay $10 per day to do it. (That is, a days work is worth $10 of satisfaction to him.) (a) If Chris earns $10 if he works, should he go to the amusement park? Explain. Benefit = $45 Cost (including opportunity cost) = $19 (admission, gas, parking) + $10 (job enjoyment) + $10 (lost wages) = $39 Benefit > Cost: Go to the amusement park! (b) If Chris earns $15 if he works, should he go to the amusement park? Explain.
Answer Key
Due Date: Tuesday, September 07, 2010
Benefit = $45 Cost (including opportunity cost) = $19 (admission, gas, parking) + $10 (job enjoyment) + $15 (lost wages) = $44 Benefit > Cost: Go to the amusement park! (c) If Chris earns $20 if he works, should he go to the amusement park? Explain. Benefit = $45 Cost (including opportunity cost) $19 = (admission, gas, parking) + $10 (job enjoyment) + $20 (lost wages) = $49 Benefit > Cost: Go to work!
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2. (Textbook Problem Question 4) You are planning a 1000-mile trip to Florida. Except for cost, you are indifferent between driving and taking the bus. Bus fare is $260. The costs of operating your car during a typical 10,000-mile driving year are as follows: Insurance Interest Fuel & oil Tires License and registration Maintenance Total $1000 2000 1200 200 50 1100 $5550
ECON 256: Intermediate Microeconomics
Short Assignment: 1
Fall 2010
Should you drive or take the bus? [Remember that the trip is a 1000-mile one, and also that the key to this problem is identifying the sunk costs.] The only costs that vary with mileage are fuel & oil, maintenance, and tires, which average $0.25/mile. The cost of driving will thus be $250 (= $0.25*1,000), and since this is less than the cost of the bus, you should drive.
Your answers will vary. Check your graded assignment for comments to your specific answer.
3. From your everyday experience write out an interesting question (pose it as a question; it makes finding the answer more interesting!) where you think the outcome that we observe is the result of an implicit cost-benefit calculation. Try to explain the possible costs and benefits involved in that decision/outcome as precisely and as best as you can.
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