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End of Chapter Exercises: Solutions: Answer: (I) Expected Opportunity Cost of $86 (Ii) Expected Opportunity Cost of $83

This document provides solutions to end of chapter exercises for Chapter 1. The solutions include: 1) Calculating the opportunity cost of betting $100 on roulette vs blackjack based on expected values. 2) Calculating the opportunity cost of taking a supermarket job vs a hotel job, factoring in hourly wages and additional compensation. 3) Calculating net present values from different perspectives (project, private, efficiency, referent group) for a foreign firm project including taxes and pollution costs. 4) Identifying which of three projects represents a Pareto improvement, potential Pareto improvement, or neither, based on the net benefits to three individuals.

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221 views2 pages

End of Chapter Exercises: Solutions: Answer: (I) Expected Opportunity Cost of $86 (Ii) Expected Opportunity Cost of $83

This document provides solutions to end of chapter exercises for Chapter 1. The solutions include: 1) Calculating the opportunity cost of betting $100 on roulette vs blackjack based on expected values. 2) Calculating the opportunity cost of taking a supermarket job vs a hotel job, factoring in hourly wages and additional compensation. 3) Calculating net present values from different perspectives (project, private, efficiency, referent group) for a foreign firm project including taxes and pollution costs. 4) Identifying which of three projects represents a Pareto improvement, potential Pareto improvement, or neither, based on the net benefits to three individuals.

Uploaded by

opi ccxv
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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End of Chapter Exercises: Solutions

Chapter 1

1. The Casino has given you $100 worth of complimentary chips which must be
wagered this evening. There are two tables – roulette and blackjack. The
expected value of $100 bet on roulette is $83, and the expected value of $100 bet
on blackjack is $86. What is:

(i) the opportunity cost of betting the chips on roulette?


(ii) the opportunity cost of betting the chips on blackjack?

Answer:
(i) expected opportunity cost of $86
(ii) expected opportunity cost of $83

2. Suppose you have been offered a choice of two part-time jobs: 10 hours a week
stacking shelves at the supermarket for $10 dollars an hour; or 12 hours a week
working in the bar of the local hotel for $8 per hour plus a free case of beer once
a week. Assuming that you will take one and only one of the jobs, what is:

(i) the opportunity cost of taking the supermarket job?


(ii) the opportunity cost of taking the hotel job?

Answer:
(i) $96 plus a case of beer
(ii) $100 plus 2 hours of leisure

3. A foreign firm is considering a project which has present values of benefits and
costs, at market prices, of $100 and $60 respectively. If the project goes ahead,
tax of $20 will be paid to the host country, and pollution costing the host country
$10 will occur. Assuming that the owners of the foreign firm are not part of the
referent group, what are the net present values generated by:

(i) the project benefit-cost analysis;


(ii) the private benefit-cost analysis;
(iii) the efficiency benefit-cost analysis;
(iv) the referent group benefit-cost analysis?

Answer:
(i) $40
(ii) $20
(iii) $30
(iv) $10

4. Suppose that the economy consists of three individuals, A, B, and C, and that
there are three projects being considered. The net benefits, measured in dollars,
received by the three individuals from each of the three projects are reported in
the following Table:

Individual Project
1 2 3

A -10 +20 +5
B +5 +1 -5
C +10 +1 -1

Which of the projects, if any, can be described as follows:

(i) a Pareto improvement


(ii) a potential (though not an actual) Pareto improvement
(iii) neither a potential nor an actual Pareto improvement

Answer:
(i) 2
(ii) 1
(iii) 3

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