Chapter 1 Thinking as an economist
Answers to review questions
1 They probably mean that, given the competing demands on their limited resources, there are other things (a holiday, private school fees, a new computer) that they choose to spend their income on rather than a plasma screen television.
2 Your friend probably means that your tennis game will improve faster if you take individual lessons instead of group lessons. However, individual lessons are also more costly than group lessons, so those people who are less concerned about how rapidly they improve may do better to take group lessons and spend what they save on other things that they value more.
3 The more valuable opportunity is the one that yields the greatest absolute…show more content… Lucy must ask herself, ‘What would I otherwise be doing if I didn’t work in my own business?’ The value of the opportunity that she is foregoing is an implicit cost of doing business and should be included when assessing the profitability of Lucy’s business.
5 When the newly elected government decides whether to allocate extra funds to complete a particular infrastructure project, the costs that have already been incurred become ‘sunk costs’. The decision should be based on a comparison of the extra benefits and extra costs that will result from completing the project, evaluated at that point in time. Insisting that all projects be completed could result in ‘throwing good money after bad’ and in investments being made by the government for which costs exceed benefits.
6 In the first case, the cost is $6 per week no matter how many bins are put out, so the cost of disposing of an extra bin of rubbish is $0. Under the tag system, the cost of putting out an extra bin is $2, regardless of the number of the bins. Since the relevant costs are higher under the tag system, we would expect this system to reduce the number of bins put out for collection.
7 At Smith’s house, each child knows that the cost of not drinking a can of cola is that it is likely to be drunk by his sibling. Each child thus has an incentive to consume rapidly in order to prevent the other from encroaching on his share. Jones, by contrast, has eliminated that incentive by