Assignment #1

The average for the first homework assignment was 81.3%. Here are the three most missed problems:

#4 (35% correct) Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year.

The opportunity cost of attending Elite U is

	$50,000
	$10,000
→	$20,000
	$15,000

The correct answer is $20,000. The question is asking for the opportunity cost of attending Elite U. Recall opportunity cost is the value of the next best alternative. In this case, Larry would receive a value of $20,000 by attending State U.

#6 (40% correct) Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is

	$7.
	$30.
→	$37.
	$37 minus the benefit of seeing the movie.

The correct answer is $37. The question is asking for the cost, not the overall value. I suspect those that got the question wrong answers $37 minus the benefit of seeing the movie. If Amy starts the night with $10 and goes to work she will have $40. If she goes to the movie instead she's left with $3. The difference between the two options is $37.

#3 (58% correct) Dean decided to play golf rather than prepare for his exam in economics that is the day after tomorrow. One can infer that

	Dean has made an irrational choice.
	Dean is doing poorly in his economics class.
→	the economic surplus from playing golf exceeded the surplus from studying.
	the cost of studying was less than the cost of golfing.

The correct answer is the "economic surplus from playing golf exceeded the surplus from studying". I suspect most people answered "the cost of studying was less than the cost of golfing". Suppose the cost of studying was $0 and the cost of golfing was $10. Wouldn't you choose to study if you were basing you decision off of costs alone. The key in this question was Dean did golf which means he received at least more value (or surplus or warm fuzzy feelings) from golfing.  This question is a lot like our classroom example where you had to decide between the two concerts. If you went to the Bruce Springsteen concert than you must have received more than $10 in surplus or you would have gone to the Bob Dylan concert.