Principles of Economics
8th Edition
by Robert H. Frank
Complete Chapter Solutions Manual
are included (Ch 1 to 28)
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,CHAPTER 1 THINKING LIKE AN ECONOMIST
Answers to Review Questions
1. Your friend probably means that the benefits from private solo lessons are greater (your
tennis game will improve faster) than if you take 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. According to the Cost-Benefit Principle, 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 he or 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. By thinking of frequent-flyer travel as free, people fail to consider the opportunity
cost of using the coupon, thereby making wasteful travel decisions.
5. Your tuition payment is a sunk cost as long as it is non-refundable, since the payment cannot
be recovered even if you drop out of school. If the payment is refundable until a certain date,
it is not a sunk cost until after that date.
Answers to Problems
1. It could be that most students are aware that there are other, more important, uses of the school's
$20 million. Because resources are scarce, having more of one thing necessarily means having
less of another. If the school spends $20 million on a new recreation facility, then it will have
$20 million less to spend on other projects, such as additional student housing. If the value to
students of those alternate projects is greater than the value they place on the new recreation
facility, then they would rationally vote "no."
2. The economic surplus from washing your dirty car is the difference between the benefit you
receive from doing so ($6) minus your cost of doing the job ($3.50), or $2.50.
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, 3. The marginal benefit of adding a pound of compost is the extra revenue you earn from the
additional pound of tomatoes grown. Therefore, you should continue to add more compost as
long as the marginal benefit exceeds or equals the marginal cost of adding another pound of
compost ($0.50). This type of problem is best answered using a table such as the one below.
Note that by adding the fourth pound of compost, you’ll get an additional 2 pounds of tomatoes,
or $0.60 in extra revenue, which covers the $0.50 cost of the extra pound of compost. However,
adding a fifth pound of compost yields only 1 additional pound of tomatoes, so revenue
increases by only $0.30, which is less than the $0.50 cost of the additional pound of compost.
Therefore, you should add 4 pounds of compost and no more.
Pounds of Pounds of Extra pounds of Extra revenue Extra or
compost tomatoes tomatoes or marginal marginal cost
benefit
0 100 - - -
1 120 20 $6.00 $0.50
2 125 5 $1.50 $0.50
3 128 3 $0.90 $0.50
4 130 2 $0.60 $0.50
5 131 1 $0.30 $0.50
6 131.5 .5 $0.15 $0.50
4. In applying the cost-benefit principle, you should only consider the costs that change with
your decision. 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. Thus, in deciding
whether to see the game, 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.).
Jamal, 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 consider the $25 he will have to spend
for his ticket. At the moment of deciding, therefore, the remaining costs Jamal must incur to
see the game are $25 higher than the remaining costs for you. And since you have identical
tastes—that is, your respective benefits of attending the game are exactly the same—Jamal
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 Jamal’s will cost only $25. But at the decision-
making moment, only the ticket cost for Jamal ($25) changes whether he goes or not, and is
therefore the only cost that should be considered.
5. If Kenya kept the $200 and invested it in additional mushrooms, at the end of a year's time she
would have $400 worth of mushrooms to sell. Therefore, Fatima must give Kenya $200 in
interest in order for Kenya not to lose money on the loan.
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