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Unformatted text preview: Econ 302- First Problem Set Solution Spring 2010-Ali Toossi Due: Wednesday, February 3 Solution to the problems from the textbook. Chapter 1: Questions for review Answer to question 1. The opportunity cost of reading a novel this evening is not being able to do whatever you would have done instead. If you would have watched TV, then your opportunity cost is not watching TV; if you would have studied economics, then your opportunity cost is not studying economics. Answer to question 2. The tuition is a sunk cost and so your roommate should consider only costs and benefits relevant now and in the future. If he will be better off in life by leaving school now, he should not let the tuition make the rest of life less meaningful. Answer to question 4. A 50 year old presumably is in a higher pay bracket than a 20 year old so the opportunity cost of leaving the job is greater for the older person. Chapter 1: Problems Answer to problem 1. Let $X be the amount Jamal earns in a day on his job. The cost to Jamal of going to the park is then $15 (admission fee) + $5 (gas & parking) + $10 (the lost satisfaction from not working) + $X (lost salary) = $30 + $X. The benefit of going to the park is $45. He should go to the park if his salary is $10/day, and shouldn't go if his salary is $20/day. At a salary of $15/day, he is indifferent between going and not going. Answer to problem 2. If Tom kept the $200 and invested it in additional mushrooms, at the end of a year's time he would have $400 worth of mushrooms to sell. Dick must therefore give Tom $200 of interest in order for Tom not to lose money on the loan. Answer to problem 3. It is reasonable to assume that everybody has decreasing satisfaction from each pound of food as consumption level increases. In University A, everybody will eat until the benefit from eating an extra pound of food is equal to $0, since this is the cost of each pound of food. In University B, people will eat until the benefit decreases to $2. Thus, everybody will eat less if they are at University B. So, not just average consumption but also each individual’s less if they are at University B....
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