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ECT: ANSWERING PROBLEMSCHAPTER 1:
1. The most you would be willing to pay for having a freshly washed
car before going out on a date is €6,- . The smallest amount for
which you would be willing to wash someone’s car is €3,50. You are
going out this evening, and your car is dirty. How much economic
surplus would you receive from washing it?
- Economic surplus from taking any action = the benefit of taking that
action – its costs.
So it means that it will be 6-3,50= 3 euros surplus.
2. To earn extra money in the summer, you grow tomatoes and sell
them at the farmers’ market for 30 cents per kg. By adding compost
to your garden, you can increase your yield as shown in the table
below. If compost costs 50 cents per kg, and your goal is to make as
much money as possible. How many kg of compost should you add?
Kg of compost (0,50 /kg) Kg of tomatoes (0,30 / kg)
0 100
1 120
2 125
3 128
4 130
5 131
6 131,5
Total costs:
If he sells 100KG of tomatoes without compost = 0,30 x 100 = 30 euros
1 kg C & 120 kg T= 120 x 0,30 = 36 euros – 0,50 = 35,50
2 kg C & 125 kg T= 125 x 0,30= 37,5 euros – 2x 0,50 = 36,50
3 kg C & 128 kg T= 128 x 0,30= 38,40 euros – 3x 0,50= 36,90
4 kg C & 130 kg T= 130 x 0,30= 39 euros – 4x 0,50 = 37,00
5 kg C & 131 kg T= 131 x 0,30= 39,30 euros – 5x 0,50= 36,80
Kg of Kg of Bene Additional Additional
compost tomatoes fit costs benefits
(0,50 /kg) (0,30 / kg)
0 100
30 0,5 6
1 120
36 0,5 1,5
2 125
37,5 0,5 0,9
3 128
38,4 0,5 0,6
4 130
39 0,5 0,3
5 131
39,3 0,5 0,15
He 6 131,5
39, 0,5
45
should add 4 kg of Compost to reach the largest amount of money,
, because if he adds 5kg, the price of the surplus will be 20 eurocents lower.
The additional benefit is lower than the additional costs.
3. Residents of your city are charged a fixed weekly fee of 6 euro’s for
garbage collection. They are allowed to put out as many bins as
they wish. The average household disposes of three bins of garbage
a week under this plan. Now suppose that your city changes to a
‘tag’ system. Each bin to be collected must have a tag affixed to it.
The tags costs 2 euro’s each and are not reusable. What affect do
you think the introduction of the tag system will have in the total
quantity of garbage collected in your city. Explain briefly.
Was: 6 euro per week
New: 3 bins a week
4. Once a week, Smith purchases a six-pack of cola and puts it in his
refrigerator for his 2 children. He invariably discovers that all 6 cans
are gone on the first day. Jones also purchases a six-pack of cola
once a week for his 2 children but, unlike Smith, he tells them that
each may drink no more than 3 cans. If the children use cost-benefit
analysis each time they decide whether to drink a can of cola,
explain why the cola lasts much longer at Jones’ house than Smith’s.
It lasts much longer at Jones’ house, because the children are told that
they may only have 3 cans each. When there is a restriction they look at
alternatives to drink.
5. –
- 200 euros as a loan he loses for Dick. In this way he can’t invest his
money into the mushrooms which will double in weight during the
first year, which means that Tom can charge double if he puts
money in the additional mushrooms (200%) But with loaning to Dirk
he loses his double payment and so Dirk has to pay 100% interest to
Tom or more.
Does it offer economic surplus?
Benefits needs to be higher than the costs.
Benefit= interest
Costs= opportunity costs= benefit of the best alternative= benefit of
mushrooms
= 200
200 to Tom or to the mushroom
So 1 year later: 200 year to Tom or getting 400 euro from the mushrooms
and he can buy new mushrooms for 200 euros.
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