sol_odd_01

# sol_odd_01 - Problem#1 Chapter 1 The most you would be...

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Problem #1, Chapter 1 The most you would be willing to pay for having a freshly washed car before going out on a date is \$6. The smallest amount of which you would be willing to wash someone else’s car is \$3.50. You are going out this evening, and your car is dirty. How much economic surplus would you receive from washing it?

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Solution to problem #1 (1) In Economics, we always assume rationality For example, you will pay \$3500 for a new mobile phone because you think the new mobile phone is worth at least \$3500 or the new phone will potentially bring you happiness or enjoyment that is worth at least \$3500 The first line says the most you would be willing to pay for a car wash is \$6 \$6 is actually your benefit of having a washed car You pay \$6 for a car wash because you think the service is worth \$6; you wont pay \$6 for a type of service that you think is only worth \$5
Solution to problem #1 (2) The question also says the smallest amount for which you would be willing to wash a car for someone is \$3.5 \$3.5 is actually your cost for performing a car wash for someone else \$3.5 is just right at compensating for the value of your effort and time spent on the car wash You would be happy if someone pays you more than \$3.5 for a car wash; however, you would not be willing to perform a car wash if someone pays you less than \$3.5 as the price does not cover the value of your alternate activity such as an afternoon tea or an afternoon nap

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Solution to problem #1 (3) Cost-benefit principle An action should be taken, if and only if, the extra benefits from taking the action are at least as great as the extra costs Benefit of performing a car wash = \$6 Cost of performing a car wash = \$3.5 Net benefit (economic surplus) is the difference between benefit and cost NB= B-C Economic surplus = \$6- \$3.5 = \$2.5
Problem #3, Chapter 1 Residents of your city are charged a fixed weekly fee of \$6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city

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sol_odd_01 - Problem#1 Chapter 1 The most you would be...

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