1. A taxi company currently has nine cabs in its fleet, and its total daily cost is...


1. A taxi company currently has nine cabs in its fleet, and its total daily cost is $4,000. If the company added a tenth cab, its daily total cost would be $4,200, or $420 per cab. Adding the tenth cab will increase the daily total revenue by $300. Should the company add the tenth cab? _________ (Yes/No)

2. In Figure suppose the marginal cost of movies is constant at $125 million. Is it sensible to produce the third movie? _________ (Yes/No)

1. A taxi company currently has nine cabs in its

3. Suppose that stricter emissions standards would reduce health-care costs by $50 million but increase the costs of fuel and emissions equipment by $30 million. Is it sensible to tighten the emissions standards? _________ (Yes/No)
4. Arrows up or down: The decision about whether to walk up an escalator is based on the _________ benefit and the _________ cost.
5. How Fast to Drive? Suppose Duke is driving to a nearby town to attend a dance party, and must decide how fast to drive. The marginal benefit of speed is the extra dance time he will get by driving faster, and the marginal cost is the additional risk of a collision. The marginal-benefit curve is negatively sloped, and the marginal-cost curve is positively sloped.
a. Draw a pair of curves that suggest Duke will drive 40 mph.
b. Suppose the normal country band is replaced by Adam Smith and the Invisible Hands, Duke’s favorite punk band. Duke s utility from slam dancing is twice his utility from the two-step. Use your curves to show how Duke s chosen speed will change.
c. Suppose Duke s favorite dance partner, Daisy, is grounded for makeup violations. Use your curves to show how Duke s chosen speed will change.
d. Suppose the legal speed limit is set at 35 mph, and there is a 50 percent chance that Duke will be caught if he speeds. Use your curves to show how Duke s chosen speed will change.
6. Continental Airlines Goes Marginal. In the 1960s, Continental Airlines puzzled observers of the airline industry and dismayed its stockholders by running flights with up to half the seats empty. The average cost of running a flight was $4,000, a figure that includes fixed costs such as airport fees and the cost of running the reservation system. A half-full aircraft generated only $3,100 of revenue.
a. Use the marginal principle to explain why Continental ran half-empty flights.
b. It will be sensible to run a half-empty flight if the marginal of flight is _____ than $ ______.
7. Marginal Airlines. Marginal Airlines runs 10 flights per day at a total cost of $50,000, including $30,000 in fixed costs for airport fees and the reservation system and $20,000 for flight crews and food service.
a. If an 11th flight would have 25 passengers, each paying $100, would it be sensible to run the flight?
b. If the 11th flight would have only 15 passengers, would it be sensible to run the flight?
8. How Many Police Officers? In your city, each police officer has a budgetary cost of $40,000 per year. The property loss from each burglary is $4,000. The first officer hired will reduce crime by 40 burglaries, and each additional officer will reduce crime by half as much as the previous one. How many officers should the city hire? Illustrate with a graph with a marginal-benefit curve and a marginal cost curve.
9. How Many Hours at the Barber Shop? The opportunity cost of your time spent cutting hair at your barbershop is $20 per hour. Electricity costs $6 per hour, and your weekly rent is $250. You normally stay open nine hours per day.
a. What is the marginal cost of staying open for one more hour?
b. If you expect to give two haircuts in the 10th hour and you charge $15 per haircut, is it sensible to stay open for the extra hour?
10. How Many Pints of Blackberries? The pleasure you get from each pint of freshly picked blackberries is $2.00. It takes you 12 minutes to pick the first pint, and each additional pint takes an additional 2 minutes (14 minutes for the second pint, 16 minutes for the third pint, and so on). The opportunity cost of your time is $0.10 per minute.
a. How many pints of blackberries should you pick? Illustrate with a complete graph.
b. How would your answer to (a) change if your pleasure decreased by $0.20 for each additional pint ($1.80 for the second, $1.60 for the third, and so on)? Illustrate with a completegraph.

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
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Macroeconomics Principles Applications And Tools

ISBN: 9780134089034

7th Edition

Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez

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