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Chapter 1

# Chapter 1 - the cost of seeing the play—at the moment...

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Chapter 1 Answers to Problems 1. The economic surplus from washing your dirty car is the benefit you receive from doing so (\$6) minus your cost of doing the job (\$3.50), or \$2.50. 3. In the first case, the cost is \$6 per week no matter how many cans you put out, so the cost of disposing of an extra can of garbage is \$0. Under the tag system, the cost of putting out an extra can is \$2, regardless of the number of the cans. Since the marginal cost of putting out cans is higher under the tag system, we would expect this system to reduce the number of cans collected. 5. If Tom kept the \$200 and invested it in additional mushrooms, at the end of a year's time he would have an additional \$400 worth of mushrooms to sell. Dick must therefore give Tom \$200 in interest in order for Tom not to lose money on the loan. 7. According to the cost-benefit criterion, the two women should make the same decision. After all, the benefit of seeing the play is the same in both cases, and
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Unformatted text preview: the cost of seeing the play—at the moment each must decide—is exactly \$10. Many people seem to feel that in the case of the lost ticket, the cost of seeing the play is not \$10 but \$20, the price of two tickets. In terms of the financial consequences, however, the loss of a ticket is clearly no different from the loss of a \$10 bill. In each case, the question is whether seeing the play is worth spending \$10. If it is worth \$10 to see the play, you should see it; otherwise you should not attend the performance. Whichever your answer, it must be the same in both cases. 9. For a seven-minute call the two phone systems charge exactly the same amount, 70 cents. But at that point under the new plan, the marginal cost is only 2 cents per minute, compared to 10 cents per minute under the current plan. And since the benefit of talking additional minutes is the same under the two plans, Tom will make longer calls under the new plan....
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