Answer+Key+to+HW+1 - purchase a truck and a mower for...

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HW 1 Intro to Economics, Econ 13 Due in class on Friday, October 8th 1. Ben decides to spend three hours working overtime on Friday evening rather than going to the bar with his friends. He earns $10 an hour. What is Ben’s opportunity cost of working overtime in this situation? (5 points) Ans: Ben’s opportunity cost is the enjoyment he could have received had he gone to the bar with his friends. 2. Angelina can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Brad can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Angelina and Brad be better off if Brad fixes meals for her and she pays him $45 per meal? Explain. (15 points) Ans: Since Angelina's opportunity cost of preparing a meal is $50, and Brad's opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made. 3. Suppose you inherit $10,000 and decide to use the money to start a lawn-care business. You
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Unformatted text preview: purchase a truck and a mower for $10,000 and start mowing lawns. Your annual cost for fuel and other supplies is $2,000. Now, instead of investing your money in the lawn-care business you could have invested the $10,000 in a bank account earning 8 percent annual interest. Additionally, you could have earned $30,000 in another job if you didnt start your own business. So what is your total annual cost (including opportunity cost) of operating your own lawn-care business? Explain. (20 points) Ans: Annual cost of fuel and other supplies is $2,000. The opportunity cost of not investing the $10,000 in the bank is the lost interest income which is $800. The opportunity cost of your time is the $30,000 you sacrificed by being your own boss. Therefore, the total annual cost of doing business is $2,000 + $800 + $30,000 = $32,800....
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