ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 2

(Week beginning July 31)

TASK 1

A) Linda gives up her $100,000 a year job at McKinsey’s to set up her own consulting
firm. Working for McKinsey’s is Linda’s best use of her time apart from operating
her own business. To set up the business, Linda must also buy an office for $50,000.
Should she choose to cease operating her own business at some future date, she knows
that she will be able to sell the office for the same price as she bought it. If she did not
buy the office she would invest the money. The annual rate of interest is 10 per cent.
What is the opportunity cost to Linda of operating her own consulting firm for a year?
Suppose Linda decides to hire a research assistant. What would she need to take into
account to calculate the opportunity cost of that decision?

B) Paul the Publisher is in the process of publishing a new textbook on

Microeconomics by Edwina Economist. The costs of supplying the book are a cost of
$10 to print each copy of the book, a cost to distribute the book to bookstores of $1 for
each copy, and then for each copy sold Edwina must be paid $5. Suppose that Paul
has printed 1000 copies and expects to sell those copies if the books are distributed.
What is the opportunity cost of choosing to distribute the book to bookstores?

C) Rent-a-Plane Inc. has agreed to charter one of its planes to take a group of tourists
from Melbourne to Cairns. The tourists will return to Melbourne by car, and hence
they do not require the plane for the return trip. Rent-a-Plane Inc. needs to return its
plane to Melbourne within one day after its arrival in Cairns. Rent-a-Plane Inc. is
approached by a group who are interested in flying one way on its plane from Cairns
to Melbourne. The manager of Rent-a-Plane Inc. wants to charge a price to that group
that will cover the opportunity cost. The cost of fuel (that does not vary with the
number of passengers) is $5,000 each way. The cost of wages to pilots is $1,000 each
way. The cost of wages to other flight crew is $1000 each way if there are passengers
and $500 each way if there are no passengers. Where passengers have traveled, the
cost of cleaning the plane is $100. What minimum amount should the manager of
Rent-a-Plane Inc. charge to the group who want to travel from Cairns to Melbourne?

TASK 2

A) You have already spent $10M on a project. You need another $5M to complete the
project. Once completed, the project will earn revenue minus operating cost equal to
$7.5M. Should you complete the project? What if the revenue minus operating cost is
$2.5M?
B) 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 3

Natalie and Leng are discussing about using monetary rewards to provide incentives
for behaviour. Natalie says: “I would always use monetary payments to get people to
act as I wanted. CEO’s pay should be tied exclusively to their companies’ share
prices, school teachers should have their pay linked to the exam performance of their
students, and any sportsperson should be paid only based on his or her individual
performance.” But Leng disagrees: “Monetary payments may be one useful
mechanism for providing incentives. But there are also other ways of providing
incentives that can be important. And you always have to be careful that monetary
incentives are not having perverse effects.”

Who do you agree with?

TASK 4

Suppose 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 in $billions, TB, of attracting more public transport customers in
millions, N, is given by TB = 10N – N2, and the total costs in $billions of attracting
more public transport customers, is given by TC = 4 + N + 2N2.

Derive expressions for the marginal benefits, MB, and marginal cost, MC, of
attracting additional patrons to public transport.

What is the number of new patrons, N*, that maximises net benefits?