Quiz 1-Econ 200 Spring 2010 30 points- Maximum of 24 minutes allowed Answer Key Ming?s aunt gives him a car as a gift on April 5, 2010. The current value of this car is $10,000. She suggests that Ming could sell this car and keep the proceeds, but if he keeps and uses it, she?ll pay for gas, maintenance, car insurance, and repairs. She claims that the use of this car is free. Ming could of course sell the car and keep the proceeds in his savings account which pays 5% interest per year. If he keeps and uses this car, the value of this car will depreciate by $5000 in one year (i.e., at the end of one year, the car will sell for $5000 instead of $10,000). Is the opportunity cost of using this car for a year i) $0.00, ii) $500, iii) $5000, iv) $ 5,500, or v) $15,000? Explain your answer. (10 points) Answer iv) is correct. The opportunity cost of using the car for a year includes the forgone annual interest from depositing the proceeds from the sale of the car. In other words, if he sells the car now and deposits the proceeds in his savings account, he would earn $500 by the year?s end. He would forgo this interest payment if he uses the car for the year. In addition, if he keeps the car and only decides to sell it at the end of one year, he incurs the cost of $5000 in depreciation; he would lose $5000 of the value of this car by keeping it for a year. Therefore he would forgo a total of $500 + $5000 = $5500 if he decides to use the car for a year and not sell it. Lili purchases a variety of goods and services, among them hamburgers. Her MV schedule for hamburgers sold by a restaurant near her house, Aussi?s Burgers, is: Q 1 2 3 4 5 6 MV ($) 16 14 12 10 8 6 Where Q measures the quantity of hamburgers per month. Aussi?s Burgers charges $10 per hamburger. The Food Court in a nearby mall also sells hamburgers and charges $4 per burger. Lili?s MV for hamburgers from the Food Court is half that of Aussi?s Burgers. Where does Lili buy her burgers (assume she only buys burgers from one place) and how many does she buy? Show your work. We need to look at her Consumer Surplus from purchasing burgers at either place! If she shops at Aussi?s Burgers, she will buy burgers up to where P = MV. Therefore she purchases 4 burgers per month. Her total expenditures are: 4 * 10 = $40 Her total value is = $16 + $14 + $12+$10 = $52 Her Consumer Surplus is = $12 Her MV schedule for burgers at the Food Court is: Q 1 2 3 4 5 6 MV ($) 8 7 6 5 4 3 If she shops at the Food Court, she will buy burgers up to where P = MV. Therefore she purchases 5 burgers per month. Her total expenditures are: 4 * 5 = $20 Her total value is = $8 + $7 + $6 + $5 + $4 = $30 Her Consumer Surplus is = $10 Since her CS is higher when she purchases her burgers at the Aussi?s, she buys her hamburgers there! She will purchase 4 burgers from Aussi?s! PAGE \* MERGEFORMAT 1
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