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# HW1S_302 - problems from the textbook Chapter 1 Questions...

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problems from the textbook. Chapter 1: Questions for review Answer to question 2. The tuition is a sunk cost and so your roommate should consider only costs and benefits relevant now and in the future. If he will be better off in life by leaving school now, he should not let the tuition make the rest of life less meaningful. Answer to question 3. Driving an automobile (which pollutes the atmosphere) imposes an external cost on others. Building a house which others admire presents an external benefit. Inventing something which is new and useful but which cannot be patented presents another external benefit. Chapter 1: Problems Answer to problem 2. If Tom kept the \$200 and invested it in additional mushrooms, at the end of a year's time he would have \$400 worth of mushrooms to sell. Dick must therefore give Tom \$200 of interest in order for Tom not to lose money on the loan. Answer to problem 4. The only costs that vary with mileage are fuel, maintenance, and tires, which average \$0.25/mile. The cost of driving will thus be \$250, and since this is less than the cost of the bus, you should drive. Answer to problem 5. The band and hall rental fees are fixed costs. The caterers charge at the rate of \$7/guest (\$5 catering bill/\$2 drink). So an extra 10 guests will increase total costs by only \$70. Answer to problem 7. Bill has already bought his ticket, so his cost-benefit calculation when it is time to go is as follows: benefit of seeing game vs. cost of the drive + time costs, etc. Joe, not having bought his ticket, faces a different calculation: benefit of seeing game vs. \$30 + cost of the drive + time costs, etc. Since the benefits are the same in each case, but the costs are larger for Joe at the moment of decision, he is less likely to go.

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