DRAFT: This module has unpublished changes.

Gabriella Barnes

Microeconomics

Exercise #1


 1.No, Jennifer has not framed her decision according to the economic model. Since Jennifer already brought books about the Italian Renaissance prior to her friend getting her interested in late Renaissance, the $150 dollars she spent is a sunk cost. A true economist would say you have to make a decision based on the future and how she could otherwise use that time. Jennifer has to compare the time she will spend researching a new topic to others things she can be doing. For example, she now has to figure out whether changing her topic and finding the new material in the library will be worth it compared to 1) just starting to read the books she already has 2) or hanging with friends during that time. She is not limited to these options but they are examples of how she could otherwise use her time.

 

 2.When you add up both plans for a phone call that is seven minutes long, both the plan he has and the new plan will cost him seventy cents for seven minutes. So if his calls continue to stay within sevens minutes the minutes nor the rate will change if he switches plans. However, if Tom exceeds seven minutes during the call, the plan he currently has would be cheaper by eight cents. The first plan will be seventy-two cents for eight minutes compared to eighty cents for eight minutes in plan two. Therefore, if Tom switches to the second plan he will either end up making his calls seven minutes or less or pay more than the plan he has now. If he continues with the plan he already has, he could call for twelve minutes for the same price as the second (eighty cents) plan at eight minutes and receive five more minutes on the phone. 

 

3. Maria had just paid a non refundable room fee of $500 which was no included in the tuition of University A. She is now learning that food is not included on the tuition ($20,000) and there is an extra $1,200 per year and an additional cost of $4 per meal if she goes over 17 meals a week. The second college that was on her list was University B. This university had a slightly higher tuition by $1,000 ($21,000). However, University B includes a meal plan of 19 meals per week and the room fee. Maria estimates that a 19 meal plan would be a better plan for her. She is now not sure of what college to go to and thinks she should just go to University A because she paid the $500 dorm fee and it is non refundable. She also thinks she should go to University A because it is only an additional $4 per meal. Is Maria basing her decision in a way consistent with the economic model? What will happen if Maria ends up eating 19 meals a week for 30 weeks a year, which school would be cheaper?

 

  • Maria is choosing University A because of the non refundable $500 dollars she already paid, this is a sunk cost because she already had paid this fee before learning of the extra cost and cannot get it back. She now has to add up the additional fees of both colleges to find which one would be cheaper. University A would be $21,200 a year including a 17 meal plan. However she wants a 19 meal plan a week which means an additional $8 per week times 30 weeks for a year. University A with the additional $240 for the extra meals is $21,420 a year. University B is $21,000 a year including a 19 meal plan. Based on these numbers and reasoning we can see that University B is the cheaper school to attend and get Maria a 19 meal plan a week. 

 

  • If Maria did in fact go to University A because she already paid the dorm fee, she would have been paying an extra $420 a year for the 19 meal plan. Maria could have lost $420 in marginal costs a year if she based her decision on the sunk cost. 
DRAFT: This module has unpublished changes.