SupplementalHandout_Ch1_DecisionMakingMa

# SupplementalHandout_Ch1_DecisionMakingMa - Econ 2 Penn...

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X-Tream ECONOMICS Harnessing the Power of Incentives RATIONALITY RULES Econ 2 / Penn State Prof. Misty Ann Stone Supplemental Handout Decision Making at the Margin Chapter 1 in Miller Answers to Exercises Exercises 1. Marginal Airlines runs 10 flights per day at a total cost of \$50,000, including \$30,000 in fixed costs for airport fees and the reservation system and \$20,o00 for flight crews and food service. a. If an 11 th flight would have 25 passengers, each paying \$1000, would it be sensible to run the flight? Yes. The \$30,000 in fixed costs must be paid whether or not the 11 th flight goes or not. Thus the marginal cost of the 11 th flight is \$20,000. If the 11 th flight had 25 passengers, each paying \$1000, it would have revenue (marginal benefit) of \$25,000. This is greater than the marginal cost of \$20,000. b. If the 11 th flight would have only 15 passengers, would it be sensible to run the flight? No. The marginal cost is still \$20,000. However, the marginal benefit is only

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## This note was uploaded on 09/25/2009 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Fall '08 term at Penn State.

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SupplementalHandout_Ch1_DecisionMakingMa - Econ 2 Penn...

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