4. At University A,
students are charged $500 regardless of how much they eat. The average
consumption is 250 pounds. No one has an INCENTIVE to eat less, or to
put less on their plate. In fact, they probably end up throwing food at
each other. At University B, students have more flexibility and choice.
If they want to eat more than 250 pounds they have to pay extra. If they
eat less they get a refund. So, they pay a COST for eating more than a
certain amount, and get a BENEFIT for eating less than average. It seems
pretty likely they would consume less food, on average.
5. You would purchase 20
megabytes. In this question, using a graph you are weighing the
benefits/value and costs of having an additional unit of memory. If the
quantity of memory your computer has is less than 20 megabytes, then the
marginal benefit/value (MB) of adding a unit of memory is greater than
its marginal cost (MC). So, if you are rational, you should add more
memory to your computer. Conversely, if your computer has more than 20
megabytes, MB of an additional unit of memory is less than its MC, in
which case you should have bought less. The optimal amount is thus 20 at
which MB of memory exactly equals its MC.
1. This is very similar to Example 2.4 on page 34 (so reading
the book before you do the homework is a very good idea). If Tom
kept the $200 and invested in growing additional mushrooms, he would
have 2($200) = $400 worth of mushrooms to sell after 1 year. Hence,
the opportunity cost of lending Dick $200 for a year is $400 - $200
= $200, which is also the amount of interest Dick should pay Tom to
prevent him from losing money on the loan. This is the book’s
solution.
You may of course question as to why the book equates the initial
value of the mushrooms to the value of capital ($200) outlaid by Tom,
and assumes that the increase in the market value of the mushrooms is
proportional to the increase in their weight. In this case, you could
have simply said that the yearly interest on the loan has to equal to
the profit forgone by Tom, which will be equal to the total revenue
from growing mushrooms minus the cost of growing mushrooms ($200).
3.
a.
You find the average cost of a shirt by dividing the total
cost (TC) of production by the total number of shirts produced. TC =
$1000 + ($2+$6)2000 = $17000. Hence, average cost of a shirt is
$17000/2000 = $8.50.
b. Marginal cost of a shirt is simply the additional cost of
producing one more shirt. Since rent does not increase with increased
production (it is like a sunk cost; we call it fixed cost), the only
additional cost is the cost of cloth, labor and energy of each
additional shirt. So, the marginal cost of an additional shirt is
equal to $2 + $6 = $8.
c. The only difference from part a is that the total
number of shirts produced has now increased to 3000, which makes the
TC = $1000 + ($2+$6)3000 = $25000. Hence, average cost of each shirt
is $25000/3000 = $8.33.
d. Marginal cost, however, is not affected by the increased
production, since the clothing, labor and energy cost of an additional
shirt is still $2 + $6 = $8.