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HW2S_302 - Econ 302 Second Problem Set Solution Spring...

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Econ 302- Second Problem Set Solution Spring 2010-Ali Toossi Due: Wednesday, February 10 Solution to the problems from the textbook. Chapter 1: Problems Answer to problem 11. The benefit of the 1st gigabyte is $800, the 2nd is $400, the 3rd is $200, the 4th is $100, the 5 th is $50, the 6 th is $25, the 7 th is $12.50 and the 8 th is $6.25. You should purchase 4 gigabytes. At higher levels of benefit, the benefit is less than the cost. At lower levels, benefit exceeds the cost. Price 800.00 400.00 200.00 100.00 1 2 3 4 5 6 7 8 9 Memory (GB) Answer to problem 13. False. The fact that she would have chosen the party before she bought her ticket means that she prefers a party to an event that costs $40. Now her choice is between two events that she can attend with no further payment. Another way to look at this: The problem says that before buying the ticket she would have chosen the party over the concert. This means B P > B C – 40. After buying the ticket, its cost is sunk and she would choose to go to part if B P > B C . This is obviously not necessarily true. Answer to problem 16. True. If you got $15,000 for the Taurus and paid that plus $5,000 more for the Camry, the entire Camry expense would have cost you $25,000. Since you have already shown that you did not want the Camry for $25,000, why would you spend that for it now? Another way to look at this: you chose to buy Ford Taurus over the Camry. This means B F - 20,000 > B C – 25,000 B C – B F <5,000. So if you sell your Ford, you have to pay another 5000 to buy a Camry, but according to the inequality you prefer Camry to Ford by less than 5000.
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Solution to Additional problems Answer to additional problem 1. a. Use marginal analysis to determine how many acres the farmer should spray. No. of Acres Sprayed Marginal Benefit Marginal cost 1 st unit 12 7 2 nd unit 10 7 3 rd unit 8 7 4 th unit 7 7 5 th unit 5 7 You are indifferent about the fourth unit but we set a rule that you consume the last unit for which MB = MC. Therefore the optimal number of acres sprayed is 4. [Answer 3 is also accepted] Use maximization of the net benefit to determine how many acres the farmer should spray.
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