econ1001_endofchapter01

# econ1001_endofchapter01 - Chapter 1 Thinking like an...

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Chapter 1 Thinking like an Economist

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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?
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

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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
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

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To earn extra money in the summer, you grow tomatoes and sell them at the farmers’ market for 30 cents per pound. By adding compost to your garden, you can increase your yield as shown in the table below. If compost costs 50 cents per pound and your goal is to make as much money as possible, how many pounds of compost should you add? Pounds of compost Pounds of tomatoes Extra Revenue 0 100 2 x 30 cents = 60 cents 1 120 5 x 30 cents = 150 cents 2 125 3 x 30 cents = 90 cents 3 128 2 x 30 cents = 60 cents 4 130 1 x 30 cents = 30 cents 5 131 0.5 x 30 cents = 15 cents 6 131.5 Chapter 1, Problem 2
Extra revenue is the revenue that you will get by adding a pound of compost. We will add the compost until extra revenue is less than the cost of adding a pound of compost, 50 cents. By adding the forth pounds of compost, you will get 60 cents in extra revenue, or 2 extra pounds of tomatoes; which is greater than the compost cost, 50 cents.

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