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 onehour 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 onehour 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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 Fall '08
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 Supply And Demand

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