answer 6 questions

Econ 202 Fall 2014 HW #1 Due 10/1/2012

1) What is the difference between the dollar cost and opportunity cost of an alternative? 2) Homer has a decision to make. His wife, Marge, asked him to run to the grocery store. If he goes

to the store, he will get a benefit worth $20 and spend $100 on groceries and gas; if he chooses not to go, he naps on the couch and pays nothing.

a. Can we calculate the opportunity cost of going to the store? If so, what is it? b. Can we calculate the opportunity cost of napping? If so, what is it?

3) The shareholders of Mr. Smiley’s Sticker Company are considering a potential buyout. If the company is bought out, they receive $500 and pay $100 in legal fees. If they don’t sell the company, they can expect $300 in profit this year and need not pay any fees. What is the opportunity cost of selling their company?

4) Dave has a big night ahead of him. He can either go see Foo Fighters, Pearl Jam, or Dave Matthews Band. He values each show at $40, $70, and $150 respectively and tickets cost $65, $40, and $200 respectively. What is the opportunity cost of seeing Pearl Jam? Which show should Dave go see?

5) Suppose Dave can make pizza and ice cream. He has ten hours in a day, and in one hour he can either make 3 pizzas or 2 ice creams.

a. Draw Dave’s hourly PPF and daily PPF. b. Does his production process exhibit increasing marginal costs? Why or why not? c. Suppose that if Dave produces ice cream today, he increases his ability tomorrow to

make pizza and ice cream tomorrow (this does not happen with pizza). In specific, for every ice cream he makes today, he can make one additional pizza and one additional ice cream tomorrow. Suppose today he was producing on the PPF efficiently and making 27 pizzas. How many ice creams was he making today? Draw his PPF for tomorrow.

6) Suppose Bella, Edward, and Jake own a smoothie shop. They can either make smoothies for humans or smoothies for vampires. Their respective daily production costs are given below, i.e. in one day Bella can make either 5 smoothies for humans or 1 smoothie for vampires.

Name Smoothies for humans Smoothies for vampires Bella 5 1 Edward 2 3 Jake 1 1

a. What is Jake’s opportunity cost of making smoothies for vampires? b. Draw their joint daily PPF. c. Does this production process exhibit increasing marginal costs? Why or why not? d. If the price of a smoothie for humans is $4 and the price of a smoothie for vampires is

$5, then where will the three choose to produce? Who will be making what?