Presentation is loading. Please wait.

Presentation is loading. Please wait.

ECON1001 Tutorial 1. Q.1 The scarcity principle implies that to have more of one thing usually means a. increasing resources b. limiting wants c. increasing.

Similar presentations


Presentation on theme: "ECON1001 Tutorial 1. Q.1 The scarcity principle implies that to have more of one thing usually means a. increasing resources b. limiting wants c. increasing."— Presentation transcript:

1 ECON1001 Tutorial 1

2 Q.1 The scarcity principle implies that to have more of one thing usually means a. increasing resources b. limiting wants c. increasing the need for another d. having less of another e. none of the above Answer: d by definition

3 Option a: Option a: if resources can be increased whenever weve scarcity, therell be no need to study economics! Option b: Option b: come on!! Admit it! Human wants are unlimited! Option c: Option c: If you need to increase your desire on B while youre having more A… youre facing a more severe scarcity problem.

4 Q.2 A sunk cost is a. the value of money sunk into investment b. beyond recovery at the moment a decision must be made c. important to consider when conducting cost-benefit analysis d. equal to the opportunity cost when the interest rate is zero e. the same as a marginal cost Answer: b definition (option d does not make sense, designed to confuse you.)

5 Q.3 When deciding whether to pursue an activity further, which of the following cost is relevant? a. sunk costs b. marginal costs c. average costs d. total costs e. fixed cost Answer: b

6 KEY: KEY: When deciding whether to pursue an activity further… Further = additional Further = additional Sunk cost: NOT recoverable at the moment you make the decision, i.e. not relevant in deciding whether to pursue an activity further… Sunk cost: NOT recoverable at the moment you make the decision, i.e. not relevant in deciding whether to pursue an activity further…

7 E.g. Isaac, who is the hottest guy among freshmen, asked you out AFTER one of the following situations: E.g. Isaac, who is the hottest guy among freshmen, asked you out AFTER one of the following situations: i.youve purchased a non-refundable $40 movie ticket. ii. youve purchased a non-refundable $2000 Madonna world tour concert ticket Assuming that the value of going out with Isaac is the highest among the 3 activities, Will there be any differences in your choice under the two situations?

8 TC vs AC vs MC Assume: Each Unit can be sold at $6 Starting from zero unit, should you produce the 1st unit? 2nd? 3rd?...5th? What happen if you evaluate the decision by looking at AC instead? QTC($)AC($)MC($)

9 Fixed Cost Fixed Cost = costs that will not be varied with production plan/ scale E.g. Rent, Management fee etc E.g. Rent, Management fee etc If, in previous example, the factory now faces a $10 increase in rent, will it increase/ decrease production plan? If, in previous example, the factory now faces a $10 increase in rent, will it increase/ decrease production plan? What if the rent is increased by $ ? What if the rent is increased by $ ?

10 Q.5 In general, rational decision making requires one to choose the actions that yield the a. largest total benefit. b. smallest average cost. c. smallest total cost. d. largest economic surplus. e. smallest net benefit. Answer: d

11 Economists ADOPTED the Economists ADOPTED the Cost-Benefit Analysis in analyzing human behavior Thus, to know how action/behavior will change under different circumstances, we need to calculate BOTH cost AND benefit Thus, to know how action/behavior will change under different circumstances, we need to calculate BOTH cost AND benefit i.e. we consider net benefit/ econ surplus i.e. we consider net benefit/ econ surplus definition: definition: econ surplus = benefit - cost

12 Q.4 Suppose the most you would be willing to pay for a plane ticket home is $250, but you buy one online for $175. The economic surplus of buying the online ticket is: a. $175. b. $250. c. $75 d. $50. e. $0. Answer: c

13 As defined in Q.5 As defined in Q.5 econ surplus = benefit – cost The economic surplus of buying the online ticket The economic surplus of buying the online ticket = willingness to pay – price Willingness to pay reflects how much you could benefit from the action Willingness to pay reflects how much you could benefit from the action Econ surplus = $250 - $175 Econ surplus = $250 - $175 = $75 = $75

14 Q.6 If each unit costs $12, and you can only buy whole units, what is the optimal quantity to purchase? a. 1 b. 2 c. 3 d. 5 e. 6 Answer: b QMB($) * MB = Marginal Benefits

15 Assume 1. P=$12/unit 2. Constant PRICE no matter how many you buy 3. The seller sells ONE UNIT BY ONE UNIT 4. Each unit is homogeneous QMB($)

16 Define: Define: Economic Surplus = Benefit – cost Economic Surplus = Benefit – cost If you purchase the good one unit by one unit, If you purchase the good one unit by one unit, THAT units econ surplus = MB - $12 Will you buy the 3rd unit? Will you buy the 3rd unit? Now assume the seller sells them in PACKAGES, while unit price is constant… Now assume the seller sells them in PACKAGES, while unit price is constant… QMB($)Surplus($)

17 Additional challenge If the good is sold in packages: If the good is sold in packages: Package of ONE unit Package of ONE unit TOTAL ECON SURPLUS = MB ($20) – cost ($12) = $8 Package of TWO units Package of TWO units TOAL ECON SURPLUS = MB 1st unit + MB 2nd unit – $12X2 = $11 Calculate all 7 packages Calculate all 7 packages Which package should you buy? Which package should you buy?

18 Q.7 What would price have to equal before 7 units would be purchased? a. 0 b. 5 c. 10 d. 15 e. 20 Answer: a QMB($) If each unit costs $x, and your optimal quantity to purchase is 7. What is $x?

19 How much will you pay for each unit if the seller sells them to you one by one ? e.g. $25 for 1st unit? or $19 for 1st unit? $18 for 2nd unit? or $14.5 for 2nd unit? : : $ for 7th unit? or 0 for 7th unit? QMB($)

20 Marginal Benefit Marginal Benefit Additional benefit for having ONE MORE UNIT Additional benefit for having ONE MORE UNIT = max amount of money youre willing to pay for having the additional unit = max amount of money youre willing to pay for having the additional unit Note: just an econ concept, NOT directly observable, but may be estimated. Note: just an econ concept, NOT directly observable, but may be estimated. So dont blame you Sociology classmate for not knowing the term in making a purchase decision So dont blame you Sociology classmate for not knowing the term in making a purchase decision AND, her purchase decision will NOT be irrational/ invalid in economics because she doesnt understand the term MB. AND, her purchase decision will NOT be irrational/ invalid in economics because she doesnt understand the term MB. Although most people do not know the term, they behave as if they are comparing marginal benefits to marginal cost in making their decisions. Although most people do not know the term, they behave as if they are comparing marginal benefits to marginal cost in making their decisions.

21 Q.8Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is a. $7. b. $30. c. $37. d. $37 minus the benefit of seeing the movie. e. indeterminate. Answer: c

22 Opportunity Cost Opportunity Cost = Value of best alternative forgone Amy has to forgo i.$7 ii.One evening Oppo. Cost for Amy to go movie = $7 + value of one evening/value given by dog sitting

23 Oppo. Cost for Amy to go movie = $7 + value of one evening/value given by dog sitting = explicit cost + implicit cost (implicit = not directly observable) = money cost + time cost

24 Modification #1 IF IF Amy is thinking about going to the movies tonight. A ticket costs $7 and she has nothing to do that night. The cost of seeing the movie is ?

25 Modification #2 IF IF Amy is very popular among friends. Tom gave her a $7 ticket and invited her to movie tonight. At the same time, Amy can i.go karaoke with Sam. (Sam will pay for her expenses, around $40) ii.Dine with Siu Ming. (Siu Mings treat, around $60) Assuming that the 3 persons are equally handsome, Q.1What will she do? Q.2What is her oppo. cost of going movie? Q.3 How will your ans in Q.2 change if Siu Ming actually prepared a surprise gift (Tiffany necklace, $2000) and Amy didnt know it until the next day?

26 Q.9 Jody has purchased a non-refundable $25 ticket to attend a Savage Garden concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, she should a. include only the entertainment value of the concert in the opportunity cost of going on the date. b. include the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the date. c. include only the cost of concert ticket in the opportunity cost of going on the date. d. include neither the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the date. e. have a psychiatric evaluation because dates cannot be evaluated using cost-benefit analysis. Answer: a

27 DECISION: DECISION: Concert VS Date Oppo. Cost of going concert Oppo. Cost of going concert = give up net economic surplus of date = value of date – expected expenses of date = value – zero (dancing at no expense to her)

28 Oppo. Cost of going date Oppo. Cost of going date = give up net economic surplus of concert = value of concert – expected expenses of concert = value – ?????? $25??? SHOULD YOU PUT IN THE COST OF TICKET!? ($25) SHOULD YOU PUT IN THE COST OF TICKET!? ($25)

29 SUNK COSTS are costs that SUNK COSTS are costs that - have already been incurred - cannot be recovered at that moment when youre making decisions Does that $25 fit in the above definitions? Does that $25 fit in the above definitions?

30 THEREFORE THEREFORE Oppo. Cost of going date Oppo. Cost of going date = give up net economic surplus of concert = value of concert – expected ADDITIONAL expenses of concert = value – zero Try to analyze the question AGAIN by using MARGINAL Value/Cost Try to analyze the question AGAIN by using MARGINAL Value/Cost

31 IF IF the ticket is fully refundable, how would it affect Jodys decision? IF IF the ticket is refundable at a discounted price, how would it affect Jodys decision?

32 Q.10 If the government wanted to use the incentive principle to discourage smoking, it would a. publicize the health risks associated with second-hand smoke. b. increase taxes on cigarettes, raising the price of a pack. c. subsidize tobacco companies. d. subsidize hospitals for treating lung disease. e. invest more money in health research. Answer: b

33 Most DIRECT way to reduce smoking: Most DIRECT way to reduce smoking: Raise Price of cigarettes DISCOURAGE CONSUMPTION DISCOURAGE CONSUMPTION Can be done by option b: Can be done by option b: impose tax on producers = increase production costs the market needs a higher market price to support the production the market needs a higher market price to support the production (common sense argument)

34 Option c & d: contradict to answer Option c & d: contradict to answer C: subsidize tobacco companies C: subsidize tobacco companies encourage productions encourage productions D: subsidize hospitals for treating lung disease. D: subsidize hospitals for treating lung disease. lower opportunity cost to smoke, encourage consumption lower opportunity cost to smoke, encourage consumption

35 Option a & e: Option a & e: also discourage smokers also discourage smokers but results NOT as direct as imposing taxes on producers reduce production + consumption but results NOT as direct as imposing taxes on producers reduce production + consumption

36 End


Download ppt "ECON1001 Tutorial 1. Q.1 The scarcity principle implies that to have more of one thing usually means a. increasing resources b. limiting wants c. increasing."

Similar presentations


Ads by Google