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Introductory Microeconomics Tutorial Tasks

ECON10004

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Humayra Tasnim
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8 views2 pages

Introductory Microeconomics Tutorial Tasks

ECON10004

Uploaded by

Humayra Tasnim
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 2


(Week beginning August 4th)

TASK 1
You are offered the opportunity to work as a tutor in Introductory Microeconomics.
Your total opportunity cost and total payments from doing different numbers of hours
of tutorials are shown in the table below. Five hours of tutoring is the maximum
possible amount. How many hours of tutoring would you choose to do each week if
you are a rational decision-maker?

Hours of tutoring Total opportunity Total payments


per week cost
0 0 0
1 $50 $120
2 $110 $200
3 $180 $260
4 $260 $300
5 $350 $320

TASK 2
Suppose the government is considering how much to invest in expanding public
transport to reduce traffic congestion. An expert committee has advised the
government that the total benefits (TB) of attracting more public transport passengers
(which we express in millions of passengers and denote by N) are given by:
TB = 10N – N2,

while the total costs (TC) are given by:


TC = 4 + N + 2N2.

a) Derive expressions for the marginal benefits (MB) and marginal costs (MC) of
attracting additional passengers.

b) What is the number of new passengers, N*, that maximises net benefits?

TASK 3
Revisit the flatmates Leonard and Sheldon discussed in lecture (and in the textbook).

Recall that Leonard could make one meal in ½ an hour, while the same task takes
Sheldon 2 hours. Doing a basket of laundry takes Sheldon 4 hours but takes Leonard
only 3 hours. We summarize all this information in the table below:

Hours needed to make


1 meal 1 basket of laundry
Sheldon 2 4
Leonard 1/2 3
The price of doing laundry baskets can be expressed in terms of meals given up.

a) Calculate the opportunity cost of doing laundry for each flatmate

b) What is the highest price at which laundry baskets can be traded (in terms of
meals given up) that makes both flatmates better off? What is the lowest
price? Explain.

TASK 4
Linda works at McKinsey where she earns $150,000 a year after taxes. She is not
saving any of this money. Working at McKinsey is currently the best use of her time.

She has been seriously considering giving up her job at McKinsey and setting up her
own business instead.

To set up a business, she would need to pay $1,000 in non-refundable registration fees.
To set up an office, she could buy a suitable space for $50,000 – money that she has
from other past savings. Should Linda decide to sell the space at any point, she would
get back exactly $50,000.

The annual rate of interest paid by commercial banks for deposits is 5%.

a) What is the opportunity cost to Linda of setting up her own business for a
year?

b) Suppose Linda set up her business and is now thinking about hiring a research
assistant (RA). Enumerate and discuss a few aspects that Linda would need to
consider to calculate the opportunity cost of hiring an RA?

Common questions

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The opportunity cost includes her current salary of $150,000, as this is foregone income. Additionally, Linda pays a non-refundable $1,000 fee and forgoes potential interest earnings on $50,000 if used to buy office space. At a 5% interest rate, that is $2,500. The total opportunity cost is $153,500 per year ($150,000 + $1,000 + $2,500).

For Leonard, doing one basket of laundry takes 3 hours during which he could make 6 meals (since 0.5 hours per meal), making his opportunity cost 6 meals. For Sheldon, it takes 4 hours to do laundry, or 2 meals (since 2 hours per meal), making his opportunity cost 2 meals. Therefore, Leonard has a higher opportunity cost for doing laundry, influencing him not to do it if they can trade below 6 meals .

A rational decision-maker would choose the number of tutoring hours where the marginal benefit equals the marginal cost. When tutoring for 3 hours, the payment is $260 and the opportunity cost is $180, making the net benefit $80, which decreases in further hours. Therefore, choosing to tutor exactly 3 hours maximizes net benefit .

Linda should consider (1) the wage she pays the RA, (2) the productivity gain or time saved, (3) alternative uses of the RA's salary amount, including investment opportunities, and (4) the potential revision of strategies and goals. These will frame the opportunity cost of hiring the RA versus using that resource differently .

To maximize net benefits, set marginal benefits equal to marginal costs. The marginal benefits, MB, derived from TB = 10N – N² is MB = 10 - 2N. The marginal costs, MC, from TC = 4 + N + 2N² is MC = 1 + 4N. Solving the equation 10 - 2N = 1 + 4N gives N* = 1.5 million passengers as the solution that maximizes net benefits .

The lowest price Sheldon would accept for doing a basket of laundry is above 2 meals, his opportunity cost, and Leonard would pay up to 6 meals, his opportunity cost. Therefore, any price between 2 and 6 meals makes both better off, with 3 or 4 meals likely being acceptable trade prices .

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