Quiz 1 with answers and hints

Quiz 1 with answers and hints - 1 Which of the following...

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1. Which of the following statements is correct? a. Positive economics deals with what ought to be. b. Positive economics is subjective, and normative economics is objective. c. Normative economics includes making judgments about the probability of future events. d. Normative economics incorporates someone’s opinion about values or goals. e. Normative economics deals with what is observable. [Hint: page 15 in textbook.] 2. This Saturday night you have decided you will go to a concert. You have been offered a discounted ticket to see the band, Powderfinger, for just $50. This is 50% off the usual price. Powderfinger is your favourite band, and on any given night you would be willing to pay up to $100 to see them. The same night another band you like, Grinspoon, is also playing and a ticket to see them only costs $40. Each band is performing only once in your town. Assume there are no other relevant costs and benefits. In terms of economic gain, which band should you see? a. Powerfinger because they are your favourite band. b. Grinspoon; so long as you were willing to pay $40 or more to see them c. Powerfinger; so long as you were willing to pay less than $90 to see Grinspoon. d. Grinspoon because tickets to see them are still cheaper in dollar terms. e. Both b and d. [Hint: You are willing to pay $100 for a Powderfinger concert but you only need to pay $50 on that night. The surplus is $50.Unless you can get $50 surplus from Grinspoon (which you could if you valued it at $90 or more), you should go to Powderfinger.] 3. Pat and Alex buy a house for $100,000. They spend $30,000 on improvements. They put it on the market and after a substantial time the best offer is $120,000. Alex wants to sell and move on, but Pat insists that they should not sell for a price that does not cover the renovations. [Hint: Option (c) is incorrect because the opportunity cost of selling is staying, (d) is incorrect because the $130,000 is a sunk cost and should not be considered, as a result Pat is wrong so (b) is incorrect as well.]
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