Thinking Like an Economist
Chapter 1 Thinking as an economist
Answers to review questions
1 They probably mean that, given the competing demands on their limited resources, there are other things (a holiday, private school fees, a new computer) that they choose to spend their income on rather than a plasma screen television.
2 Your friend probably means that your tennis game will improve faster if you take individual lessons instead of group lessons. However, individual lessons are also more costly than group lessons, so those people who are less concerned about how rapidly they improve may do better to take group lessons and spend what they save on other things that they value more.
3 The more valuable opportunity is the one that yields the greatest absolute gain. Even though saving $100 on a $2000 plane ticket represents only a 5 percent saving, which is less than the 45 percent saving you would make on the Brisbane ticket, the $100 save is more valuable to you than the $90 saving.
4 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 she would fail to earn by seeing the movie. As Sherlock Holmes recognised, it’s easier to notice that a dog has barked than that it has failed to bark.
5 You are wrong to suggest that the album cost you nothing. The astute economic thinker would know to ask the question ‘What would I otherwise have done with the gift voucher?’ If the answer to this question was to let it expire unused, then you would be correct in treating the Black Eyed Peas album as free. It is, however, more likely that you would have used the voucher to buy some other album. If so, the opportunity cost of the Black Eyed Peas album is your reservation price for the album that you would have otherwise purchased.
6 If your tuition payment is non-refundable, it is a sunk cost. If the payment is refundable until a certain date, it is not a sunk cost before that date but becomes one after it.
7 It is impossible
Answers to review questions
1 They probably mean that, given the competing demands on their limited resources, there are other things (a holiday, private school fees, a new computer) that they choose to spend their income on rather than a plasma screen television.
2 Your friend probably means that your tennis game will improve faster if you take individual lessons instead of group lessons. However, individual lessons are also more costly than group lessons, so those people who are less concerned about how rapidly they improve may do better to take group lessons and spend what they save on other things that they value more.
3 The more valuable opportunity is the one that yields the greatest absolute gain. Even though saving $100 on a $2000 plane ticket represents only a 5 percent saving, which is less than the 45 percent saving you would make on the Brisbane ticket, the $100 save is more valuable to you than the $90 saving.
4 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 she would fail to earn by seeing the movie. As Sherlock Holmes recognised, it’s easier to notice that a dog has barked than that it has failed to bark.
5 You are wrong to suggest that the album cost you nothing. The astute economic thinker would know to ask the question ‘What would I otherwise have done with the gift voucher?’ If the answer to this question was to let it expire unused, then you would be correct in treating the Black Eyed Peas album as free. It is, however, more likely that you would have used the voucher to buy some other album. If so, the opportunity cost of the Black Eyed Peas album is your reservation price for the album that you would have otherwise purchased.
6 If your tuition payment is non-refundable, it is a sunk cost. If the payment is refundable until a certain date, it is not a sunk cost before that date but becomes one after it.
7 It is impossible