This preview shows pages 1–2. Sign up to view the full content.

ECF1100: MICROECONOMICS Answers to tutorial 2 Chapter 1, Problem 2 The benefit of adding an extra bag of compost is the extra revenue you will get from the extra tomatoes that result. The cost of adding a bag of compost is \$5. Adding the fourth bag of compost will result in two extra kilos of tomatoes, or \$6 in extra revenue, which more than covers the \$5 cost of the extra bag of compost. However, adding the fifth bag of compost gives only one extra kilo of tomatoes, so the corresponding revenue increase (\$3) is less than the cost of the compost. The cost-benefit principle suggests that you should add four bags of compost and no more. Chapter 1, Problem 3 A 2 percent saving on a \$100,000 bill is \$2000. A 15 percent saving on a \$10,000 bill is \$1500. For the same investment, the café’s owner should prefer the 2 per cent saving on \$100,000 rather than the 15 percent saving on \$10,000. The rules of sound economic thinking suggest that it is the absolute change in the value of costs and benefits that matter, not the proportional change. Chapter 1, Problem 6 In the first case, the cost is \$6 per week no matter how many bins are put out, so the cost of disposing of an extra bin of rubbish is \$0. Under the tag system, the cost of putting out an extra bin is \$2, regardless of the number of the bins. Since the relevant costs, or the extra costs, are higher under the tag system, we would expect this system

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.