Problem Set Number 1, Economics 2020 Name ___KEY__________ Dr. Patricia A. DuffyDue Date: August 31, 2006.1)3 points eachProvide the term for the definition. a) The value of the next-best alternative that must be forgone (given up) to undertake an activity ______opportunity cost_____________ b) A cost already incurred so it is not recoverable and no future decision can return that cost to you _______sunk cost_____________ c) The increase in total cost, which results from carrying out one additional unit of an activity _____marginal cost_________________________ d) The total benefit of undertaking n units of an activity divided by n ____average benefit____ e) One person has a __comparative advantage_________ over another if his opportunity cost of performing a task is lower than the other person’s opportunity cost. 2) 10 points You won a free pass to see a Rolling Stones concert (which has no resale value). Aerosmith is performing on the same night and is your next-best alternative activity. Tickets to see Aerosmith cost $80 (your cost). You would be willing to pay up to $100 to see Aerosmith (your benefit). Assume there any other costs of seeing either band are identical. Based on this information, what value would you need to place on seeing the “free” Rolling Stones concert to make the two options equally attractive to you? _______$20_________________________To make these choices equal, the net benefit (economic surplus) from one choice would equal the net benefit (economic surplus) from another. BenefitofAerosmith($100) – CostofAreosmith($80) = $20 surplus for Aerosmith. BenefitofRS(?) – CostofRS(0) = $20.
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