Graded HW 1 - Econ 221 Graded Homework 1 This assignment is...

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Econ 221 Graded Homework 1 This assignment is worth 64 points. It is due in class on the day of Exam 1. Please adhere to my guidelines which are posted on WebCT under “Course Content”. Failure to do will result in a penalty. 1. Opportunity Cost (2 pts.) Your friend is preparing for an exam and in the review session makes the following statement: "Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up." Is your friend's analysis correct or not? Explain your answer. 2. Incentives (2 pts.) Consider the following summary of a WSJ article. The number of people involuntarily bumped off flights bounced up more than 40% to 185,368 in the second quarter, compared with the same period in 2005, according to government data. Also, the number of passengers enticed to voluntarily give up seats on overbooked flights rose more than 10% in the second quarter over last year." The reason for the increase in overbooked flights: Higher fuel prices. With the increased marginal cost of flying planes, airlines have cut back on the number of flights, thus jamming more people onto remaining trips. Furthermore, airlines have the financial incentive to overbook flights. "The DOT requires that airlines compensate passengers for bumping them off flights, but the maximum amount of $400 was set in 1978 and hasn't changed. Had the maximum amount been adjusted for inflation, it would be more than $1,200 today. And some argue that since the last tickets sold are usually more expensive, airlines have too much incentive to sell $1,000 tickets when no seats are available if the penalty is only $400 to bump a cheaper-fare passenger. Source: “More Fliers Forced to Give Up Seats”, by Scott McCartney, Oct 10, 2006, Wall Street Journal, Page D.1 Why does the policy of airlines paying bumped flyers $400 encourage airlines to overbook flights? (No more than 3 choice sentences, please. Use economic concepts and terms. 3. Opportunity Cost (2 pts.) Baseball's New York Yankees allow season-ticket holders to electronically forward tickets to a charitable organization, Big Brothers and Big Sisters of New York City. The processing fee is waived. Suppose the price of a ticket is $150. What is the opportunity cost to the ticket holder who donates her ticket to the charity in the following 2 cases: where a ticket holder (i) can sell the ticket, and (ii) cannot sell the ticket. Keep things simple, do not worry about tax treatments.
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4. The Law of Demand (4 pts.) John and Steve are roommates at Siberian University. They are planning to have a party this coming weekend and need to go shopping for munchies. They know all of their friends like nacho cheese flavored tortilla chips, so that is the only type of munchie they plan to buy. After pooling their cash, they take $18 and head out to the nearest grocery store. Walking down the chip aisle, they fill their cart with 6 bags of
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This note was uploaded on 05/10/2010 for the course ECON 221 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Graded HW 1 - Econ 221 Graded Homework 1 This assignment is...

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