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answerkey ch1 3ed

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Answers to Text Questions and Problems, Chapter 1 Answers to Review Questions 1. Your friend probably means that your tennis game will improve faster if you take solo private lessons instead of group lessons. But private lessons are also more costly than group lessons. So those people who don’t care that much about how rapidly they improve may do better to take group lessons and spend what they save on other things. 2. Sam’s decision could be rational if the shop he chose has, say, a more convenient location or a better reputation for standing behind its products, and he considers these advantages to be worth the extra $30. 3. False. Your willingness to make the trip should depend only on whether $30 is more or less than the cost of driving downtown. 4. Because the price of a movie ticket is a cost the patron must pay explicitly, it tends to be more noticeable than the money that she would fail to earn by seeing the movie. As Sherlock Holmes recognized, it’s easier to notice that a dog has barked than that it has failed to bark. 5. Using a frequent flyer coupon for one trip usually means not having one available to use for another. Thinking of frequent flyer travel as free therefore leads people to take some trips that they shouldn’t. 6. Suppose you put $10 million in the bank today and left it there to earn interest for the next ten years. The amount you’d have in your account at the end of 10 years would be much greater than if you put $1 million a year into the same account for the next ten years. 7. If your tuition payment is nonrefundable, it is both a sunk cost and a fixed cost. If the payment is refundable, it is a fixed cost but not a sunk cost. Answers to Problems 1a. If the marginal cost drops to $150, then 2 gigabytes is no longer the optimum amount of memory to install, as the marginal cost is now less than the marginal benefit. Instead, it would be optimal to continue installing memory as long as the marginal benefit exceeds the marginal cost, and to stop when marginal benefit equals marginal cost. This occurs at 4 gigabytes of memory. b. The marginal benefit curve will shift to the right. At the initial amount of memory, the marginal benefit will now answerkey ch1 3ed file:///C:/Documents%20and%20Settings/Administrator/My%20Documen... 1 of 9 1/3/2010 2:31 PM
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exceed the marginal cost, so it will be optimal to install more memory. c. A fall in the marginal cost and a rise in the marginal benefit alone will each raise the optimum amount of memory to install. Together, the effect will be a huge increase in the amount of memory installed on new computers. 2. The economic surplus from washing your dirty car is $6 minus $3.50, or $2.50. 3. The benefit of adding a kilogram of compost is the extra revenue you’ll get from the extra tomatoes that result.
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