ECON10004: INTRODUCTORY MICROECONOMICS
TASKS FOR TUTORIAL 2
(Week beginning August 4th)
TASK 1
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 2
Suppose the 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 (TB) of attracting more public transport passengers
(which we express in millions of passengers and denote by N) are given by:
TB = 10N – N2,
while the total costs (TC) are given by:
TC = 4 + N + 2N2.
a) Derive expressions for the marginal benefits (MB) and marginal costs (MC) of
attracting additional passengers.
b) What is the number of new passengers, N*, that maximises net benefits?
TASK 3
Revisit the flatmates Leonard and Sheldon discussed in lecture (and in the textbook).
Recall that Leonard could make one meal in ½ an hour, while the same task takes
Sheldon 2 hours. Doing a basket of laundry takes Sheldon 4 hours but takes Leonard
only 3 hours. We summarize all this information in the table below:
Hours needed to make
1 meal 1 basket of laundry
Sheldon 2 4
Leonard 1/2 3
The price of doing laundry baskets can be expressed in terms of meals given up.
a) Calculate the opportunity cost of doing laundry for each flatmate
b) What is the highest price at which laundry baskets can be traded (in terms of
meals given up) that makes both flatmates better off? What is the lowest
price? Explain.
TASK 4
Linda works at McKinsey where she earns $150,000 a year after taxes. She is not
saving any of this money. Working at McKinsey is currently the best use of her time.
She has been seriously considering giving up her job at McKinsey and setting up her
own business instead.
To set up a business, she would need to pay $1,000 in non-refundable registration fees.
To set up an office, she could buy a suitable space for $50,000 – money that she has
from other past savings. Should Linda decide to sell the space at any point, she would
get back exactly $50,000.
The annual rate of interest paid by commercial banks for deposits is 5%.
a) What is the opportunity cost to Linda of setting up her own business for a
year?
b) Suppose Linda set up her business and is now thinking about hiring a research
assistant (RA). Enumerate and discuss a few aspects that Linda would need to
consider to calculate the opportunity cost of hiring an RA?
