Answers to Review Questions 1. Your friend probably means that your tennis game will improve faster if you take solo private lessons instead of group lessons. But private lessons are also more costly than group lessons. So those people who don' t care that much about ho rapidly they improve may do better to take group lessons and spend what they save on other things 2. False. Your willingness to make the trip should depend only on whether $30 is more or less than the cost of driving downtown. 3. Because the price of a movie ticket is a cost the patron must pay explicitly, it tends to be more noticeable than the money that she would fail to earn by see ing the mov ie As Sherlock holmes recogn ized. it's easier to notice that a dog has barked than that it has failed to bark 4. Using a frequent flyer coupon for one trip usually means not having one available to use for another. Thinking of frequent-flyer travel as free therefore leads people to take some trips that they shouldn 't 5. If your tuition payment is non-refundable, it is a sunk cost. If the payment is refundable until a certain date. it is not a sunk cost before that date but becomes one after it Answers to problems 1. The economic surplus from washing your dirty car is the benefit you receive from doing so($6)minus your cost of doing the job($3.50), or $2.50 2. The benefit of add ing a pound of compost is the extra revenue you' ll get from the extra tomatoes that result. The cost of adding a pound of compost is 50 cents. B adding the fourth pound of compost you' ll get 2 extra pounds of tomatoes, or 60 cents in extra revenue, which more than covers the 50-cent cost of the extra pound of compost. But add ing the fifth pound of compost gives only 1 extra pound of tomatoes, so the corresponding revenue increase(30 cents)is less than the cost of the compost. You should add 4 pounds of compost and no more 3. In the first case, the cost is $6/week no matter how many cans you put out, so the cost of d isposing of an extra can of garbage is $0. Under the tag system, the cost of putting out an extra can is $2, regardless of the number of the cans. Since the relevant costs are higher under the tag system, we would expect this system to reduce the number of cans collected
Answers to Review Questions 1. Your friend probably means that your tennis game will improve faster if you take solo private lessons instead of group lessons. But private lessons are also more costly than group lessons. So those people who don’t care that much about how rapidly they improve may do better to take group lessons and spend what they save on other things. 2. False. Your willingness to make the trip should depend only on whether $30 is more or less than the cost of driving downtown. 3. Because the price of a movie ticket is a cost the patron must pay explicitly, it tends to be more noticeable than the money that she would fail to earn by seeing the movie. As Sherlock Holmes recognized, it’s easier to notice that a dog has barked than that it has failed to bark. 4. Using a frequent flyer coupon for one trip usually means not having one available to use for another. Thinking of frequent-flyer travel as free therefore leads people to take some trips that they shouldn't. 5. If your tuition payment is non-refundable, it is a sunk cost. If the payment is refundable until a certain date, it is not a sunk cost before that date but becomes one after it. Answers to Problems 1. The economic surplus from washing your dirty car is the benefit you receive from doing so ($6) minus your cost of doing the job ($3.50), or $2.50. 2. The benefit of adding a pound of compost is the extra revenue you’ll get from the extra tomatoes that result. The cost of adding a pound of compost is 50 cents. By adding the fourth pound of compost you’ll get 2 extra pounds of tomatoes, or 60 cents in extra revenue, which more than covers the 50-cent cost of the extra pound of compost. But adding the fifth pound of compost gives only 1 extra pound of tomatoes, so the corresponding revenue increase (30 cents) is less than the cost of the compost. You should add 4 pounds of compost and no more. 3. In the first case, the cost is $6/week no matter how many cans you put out, so the cost of disposing of an extra can of garbage is $0. Under the tag system, the cost of putting out an extra can is $2, regardless of the number of the cans. Since the relevant costs are higher under the tag system, we would expect this system to reduce the number of cans collected
4. At Smith's house. each child knows that the cost of not drinking a can of cola now is that it is likely to end up being drunk by his sibling. Each thus has an incentive to consume rapidly to prevent the other from encroaching on his share. Jones, by contrast, has eliminated that incentive by making sure that neither child can drink more than half the cans. This step permits his children to consume at a slower, more enjoyable pace 5. If Tom kept the $200 and invested it in additional mushrooms, at the end of a years time he would have an additional $400 worth of mushrooms to sell. Dick must therefore give Tom $400 in interest in order for Tom not to lose money on the loan 6. Even though you earned four times as many points from the first question than from the second, the last minute you spent on question 2 added 6 more points to your total score than the last minute you spent on question 1. That means you should 2 7. Accord ing to the cost-benefit criterion, the two women should make the same decision. After all, the benefit of seeing the play is the same in both cases, and the cost of seeing the play-at the moment each must decide--is exactly $10. Many people seem to feel that in the case of the lost ticket, the cost of see ing the play is not S10 but $20, the price of two tickets. In terms of the financial consequences, however, the loss of a ticket is clearly no different from the loss of a $10 bill. In each case, the question is whether seeing the play is worth spend ing $10. If it is, you should see it; otherwise not. Whichever your answer, it must be the same in both case 8. Since you have already bought your ticket, the $30 you spent on it is a sunk cost It is money you cannot recover, whether or not you go to the game. In deciding whether to see the game, then, you should compare the benefit of seeing the game(as measured by the largest dollar amount you would be willing to pay to see it)to only those additional costs you must incur to see the game( the opportunity cost of your time, whatever cost you assign to driving through the snowstorm, etc. ) But you should not include the cost of your ticket. That is $30 you will never see again, whether you go to the game or not Joe, too, must weigh the opportunity cost of his time and the hassle of the drive in deciding whether to attend the game. But he must also weigh the $25 he will have to spend for his ticket. At the moment of decid ing, therefore, the remaining costs Joe must incur to see the game are $25 higher than the remain ing costs for you. And since you both have identical tastes that is, since your respective benefits of attending the game are exactly the same-Joe should be less likely to make the trip. You might think the cost of seeing the game is higher for you, since your ticket cost $30, whereas Joe's will cost only $25. But at the moment of decid ing whether to make the drive
4. At Smith’s house, each child knows that the cost of not drinking a can of cola now is that it is likely to end up being drunk by his sibling. Each thus has an incentive to consume rapidly to prevent the other from encroaching on his share. Jones, by contrast, has eliminated that incentive by making sure that neither child can drink more than half the cans. This step permits his children to consume at a slower, more enjoyable pace. 5. If Tom kept the $200 and invested it in additional mushrooms, at the end of a year's time he would have an additional $400 worth of mushrooms to sell. Dick must therefore give Tom $400 in interest in order for Tom not to lose money on the loan. 6. Even though you earned four times as many points from the first question than from the second, the last minute you spent on question 2 added 6 more points to your total score than the last minute you spent on question 1. That means you should have spent more time on question 2. 7. According to the cost-benefit criterion, the two women should make the same decision. After all, the benefit of seeing the play is the same in both cases, and the cost of seeing the play—at the moment each must decide—is exactly $10. Many people seem to feel that in the case of the lost ticket, the cost of seeing the play is not $10 but $20, the price of two tickets. In terms of the financial consequences, however, the loss of a ticket is clearly no different from the loss of a $10 bill. In each case, the question is whether seeing the play is worth spending $10. If it is, you should see it; otherwise not. Whichever your answer, it must be the same in both cases. 8. Since you have already bought your ticket, the $30 you spent on it is a sunk cost. It is money you cannot recover, whether or not you go to the game. In deciding whether to see the game, then, you should compare the benefit of seeing the game (as measured by the largest dollar amount you would be willing to pay to see it) to only those additional costs you must incur to see the game (the opportunity cost of your time, whatever cost you assign to driving through the snowstorm, etc.). But you should not include the cost of your ticket. That is $30 you will never see again, whether you go to the game or not. Joe, too, must weigh the opportunity cost of his time and the hassle of the drive in deciding whether to attend the game. But he must also weigh the $25 he will have to spend for his ticket. At the moment of deciding, therefore, the remaining costs Joe must incur to see the game are $25 higher than the remaining costs for you. And since you both have identical tastes—that is, since your respective benefits of attending the game are exactly the same—Joe should be less likely to make the trip. You might think the cost of seeing the game is higher for you, since your ticket cost $30, whereas Joe’s will cost only $25. But at the moment of deciding whether to make the drive
the $25 is a relevant cost for Joe, whereas your $30 is a sunk cost-and hence an irrelevant one for you 9. For a seven-minute call the two phone sy stems charge exactly the same amount, 70 cents. But at that point under the new plan, the marginal cost is only 2 cents per minute, compared to 10 cents per minute under the current plan. And since the benefit of talking add itional minutes is the same under the two plans, Tom will make longer calls under the new plan 10. In University A, everybody will keep eating until the benefit from eating an extra pound of food is equal to $O, since that is the extra cost to them for each extra pound they eat. In University B, the cost of eating an extra pound of food is $2,so will stop eating when the benefit of eating an extra pound falls to $2. Food consumption will thus be higher at University A
the $25 is a relevant cost for Joe, whereas your $30 is a sunk cost—and hence an irrelevant one for you. 9. For a seven-minute call the two phone systems charge exactly the same amount, 70 cents. But at that point under the new plan, the marginal cost is only 2 cents per minute, compared to 10 cents per minute under the current plan. And since the benefit of talking additional minutes is the same under the two plans, Tom will make longer calls under the new plan. 10. In University A, everybody will keep eating until the benefit from eating an extra pound of food is equal to $0, since that is the extra cost to them for each extra pound of food they eat. In University B, the cost of eating an extra pound of food is $2, so people will stop eating when the benefit of eating an extra pound falls to $2. Food consumption will thus be higher at University A
