AK5 Fall 2009 v 4

AK5 Fall 2009 v 4 - Answer Key for Problem Set 5 ECON 211...

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Answer Key for Problem Set 5 ECON 211, Fall 2009 Due on Friday, October 9 Part 1: Graded Questions Problem 1: 30 points (Krugman Chapter 9 Problem 7) You are the manager of a gym, and you have to decide how many customers to admit each hour. Assume that each customer stays exactly one hour. Customers are costly to admit because they inflict wear and tear on the exercise equipment. Moreover, each additional customer generates more wear and tear than the customer before. As a result, the gym faces increasing marginal cost. The accompanying table shows the marginal costs associated with each number of customers per hour. a. (15 points) Suppose that each customer pays $15.25 for a one-hour workout. Use the principle of marginal analysis to find the optimal number of customers that you should admit per hour. The marginal benefit of each customer is $15.25: each additional customer you admit increases the total benefit to the gym by $15.25. So you should admit three customers per hour. Here is how you could think about that decision. Suppose you currently admit no customers. Admitting the first customer gives the gym a marginal benefit of $15.25 and a marginal cost of $14.00. Since the marginal benefit of that first customer exceeds the marginal cost, you want to admit the first customer. For the second customer, the marginal benefit ($15.25) also exceeds the marginal cost ($14.50), so you want to admit the second customer, too. The same is true for the third customer: the marginal
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benefit ($15.25) exceeds the marginal cost ($15.00), so you also want to admit the third customer. For the fourth customer, however, the marginal cost ($15.50) exceeds the marginal benefit ($15.25), so you do not want to admit a fourth customer. b. (15 points) You increase the price of a one-hour workout to $16.25. What is the optimal number of customers per hour that you should admit now? By reasoning similar to that in part a, you now want to admit five customers. For the fifth customer, the marginal benefit ($16.25) exceeds the marginal cost ($16.00). For the sixth customer, however, the marginal cost ($16.50) exceeds the marginal benefit, so you do not want to admit a sixth customer. Problem 2: 30 points (Krugman Chapter 9 Problem 1) Hiro owns and operates a small business that provides economic consulting services. During the year he spends $55,000 on travel to clients and other expenses, and the computer that he owns depreciates by $2,000. If he didn’t use the computer, he could sell it and earn yearly interest of $100 on the money created through this sale. Hiro’s total
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This note was uploaded on 12/07/2009 for the course ECON 211 taught by Professor Na during the Fall '08 term at Rice.

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AK5 Fall 2009 v 4 - Answer Key for Problem Set 5 ECON 211...

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