Answer problems 1 - 10 (including the letters).

268 l PART 4 ECONOMICS AND DEClSION MAKiNG PROBLEMS 1. Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. She runs the business out of a room in her home. If she didn't use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn't run her own business, she could return to her previous job at a large software company that would pay her a sal ary of $60,000 per year. Jackie has no other expenses. a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero? b. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic prot of just Zero? . You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addi tion, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store? . Suppose you have just paid a nonrefundable fee of $1,000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. a. You are offered a parttime job in a restaurant where you can eat for free each evening. Your par ents say that you should eat dinner in the cafeteria anyway, since you have already paid for those meals. Are your parents right? Explain why or why not. b. You are offered a part-time job in a different restau rant where, rather than being able to eat for free, you receive only a large discount on your meals. Each meal there will cost you $2; if you eat there each evening this semester, it will add up to $200. Your roommate says that you should eat in the res- taurant since it costs less than the $1,000 that you paid for the meal plan. 15 your roommate right? Explain why or why not. . You have bought a $10 ticket in advance for the college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20. After you have bought the ticket, you hear that there will be a professional baseball post season game at the same time. Tickets to the baseball game cost $20, and you know that going to the base ball game will give you a benefit equal to $35. You tell your friends the following: \"If I had known about the baseball game before buying the ticket to the soccer game, I would have gone to the baseball game instead. . Amy, Bill, and Carla all mow lawns for money. : , . You are the manager of a gym, and you have to __ intemttive ant ' But now that I already have the ticket to the u _ game, it's better for me to just go to the soccer Are you making the correct decision? Justify 1 answer by calculating the benefits and costs of ' decision. . them operates a different lawn mower. The an 7' nying table shows the total cost to Amy, Bill, . x 7 of mowing lawns. Quantity of lawns Amy's Bill's mowed total cost ' Iotalcost 0 $0 $0 1 ' 20' ' ' 1Z0\"- 2 35 20 '3 45 \" so; 4 50 4O 5 '52- -- 530 6 53 60 a. Calculate Amy's, Bill's, and Carla's marginal ,, f and draw each of their marginal cost curves. b. Who has increasing marginal cost, who has 1 '. ing marginal cost, and who has constant cost? how many customers to admit each hour. As u= ' that each customer stays exactly one hour. C :r are costly to admit because they inflict wear . l _, on the exercise equipment. Moreover, each adn r' customer generates more wear and tear than I .' tomer before. As a result, the gym faces incre I marginal cost. The accompanying table shOWS x r. marginal costs associated with each number of . tomers per hour. ' Quantity of customers per hour Marginal cost .of customer 0 $14.00 1 14.50 2 15.00 3 15.50 4 16.00 5 16.50 6 17.00 7 CHAPTER 9 a. Suppose that each customer pays $15.25 for a one hour workout. Use the profit-maximizing principle of marginal analysis to find the optimal number of customers that you should admit per hour. b. You increase the price of a one-hour workout to $16.25. What is the optimal number of customers per hour that you should admit now? . Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. The accompanying table shows Georgia's and Lauren's esti- mates of the marginal benefit that each of them gets from each class per week. Lauren's Georgia-'5 Quantity of marginal benefit marginal benefit classes of eaen'clas's of each class- 0 $23 $28 1 19 2 2 2 14 1 5 3 8 7 4 a. Use marginal analysis to find Lauren's optimal num- ber of karate classes per week. Explain your answer. b. Use marginal analysis to find Georgia's optimal number of karate classes per week. Explain your answer. The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole popula tion against the smallpox virus because the vaccina- tion has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccina tion program. Percent of Deaths due to population Death'sdue to vaccination side vaccinated smallpox effects 0% 200 0 10 . 1 8.0 4 20 1 6 0 10 30 140 1'8 40 1 20 33 50 'J 00 50 60 80 74 a. Calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of each 10% increment of smallpox vaccination. Cal- culate the net increase in human lives for each 10% increment in population vaccinated. b. Using marginal analysis, determine the optimal per- centage of the population that should be vaccinated. oecrsrow MAKlNG BY lNDlVlDUALS AND FIRMS I 269 9. Patty delivers pizza using her own car, and she is paid according to the number of pizzas she delivers. The accompanying table shows Patty's total benefit and total cost when she works a specific number of hours. Quantityof . _ hourswarked Total benefit Total cost 0 $0 $0 1 ' 30" i i '10 2 55 21 3 '75 . , . . .34 .- 4 90 50 s f 10.0 I ' ' to :1. Use marginal analysis to determine Patty's optimal number of hours worked. I). Calculate the total profit to Patty from working 0 hours, 1 hour, 2 hours, and so on. Now suppose Patty chooses to work for 1 hour. Compare her total profit from working for 1 hour with her total profit from working the optimal number of hours. How much would she lose by working for only 1 hour? 10. Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce shoppers to buy more. Fur- thermore, each additional diamond that is produced costs more than the previous one due to the difficulty of mining for diamonds. De Beers's total benefit sched ule is given in the accompanying table, along with its total cost schedule. Quantity of __ diamonds Total benefit Total cost 0 $0 $0 1 1,000 . 5.0 2 1,900 100 :'3 2.700 200 4 3,400 400 5 4.000 8-00 6 4,500 1,500 7 4.900 2,500 8 5,200 3.800 a. Draw the marginal cost curve and the marginal benefit curve and, from your diagram, graphically derive the optimal quantity of diamonds to produce. b. Calculate the total profit to De Beers from produc- ing each quantity of diamonds. Which quantity gives De Beers the highest total profit? 11. In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. a. Kookie's best friend likes to give her gift cards that Kookie can use at her favorite stores. Kookie