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Answers to Questions for Review 1. The opportunity cost of reading a novel this evening is not being able to do whatever you would have done instead. If you would have watched TV, then your opportunity cost is not watching TV; if you would have studied economics, then your opportunity cost is not studying economics. 2. The self-interest standard of rationality assumes that people are selfish and do not consider the effect of their actions on others. The present aim standard is more broadly focused. It simply states that people can have goals that come from a wide variety of motivations and that these goals are pursued in the most efficient possible way. The present aim standard allows for altruism and other types of behavior that the self-interest standard explicitly rejects. 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. 4. The self-interest model predicts that people will not vote in large elections since the probability that one vote will sway the election is extremely small. However, if one believes that voting is a civic obligation, then this belief may outweigh one's self-interest. 5. By definition, a sunk cost is a cost that is incurred regardless of one's current decisions. 6. Economists generally argue that people act in their own self-interest even if they do not consistently evaluate costs and benefits. The analogy most frequently used (from Milton Friedman) is that of a pool player who knows how to sink his shots without having studied physics. Answers to Chapter 1 Problems 1. Let \$X be the amount Jamal earns in a day on his job. The cost to Jamal of going to the park is then \$15 (admission fee) + \$5 (gas & parking) + \$10 (the lost satisfaction from not working) + \$X (lost salary) = \$30 + \$X. The benefit of going to the park is \$45. He should go to the park if his salary is \$10/day, and shouldn't go if his salary is \$20/day. At a salary of \$15/day, he is indifferent between

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