Chat with us, powered by LiveChat 1.2? Because of the housing bubble, many houses are now - Study Help


Because of the housing bubble, many houses are now selling for much less than their selling price just two to three years ago. There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What fallacy are they making?

Discussion 2.1

Children in poor neighborhoods have bleak outlooks on life and do not see much gain to studying. A recent experiment is paying children in poor neighborhoods $100 for each ?A? they earn in a six-week grade reporting cycle. How does this affect the children?s behavior?

Discussion 2.2

Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the government nationalized the health-care system and reduced doctors? compensation. Is this a form of post-investment hold-up?

1. Suppose the government is considering penalizing airlines $27,500 per passenger each time passengers are made to remain on the plane on the tarmac for more than three hours before a flight.

True or False: The threat of this fine could increase delays by forcing airlines to deplane and reboard more than necessary.



3. Individual Problems 2-3

Suppose an individual is looking to build a house in a plain that is prone to flooding. Because of the risk of damage due to flooding, the buyer’s top dollar for building the house is only $280,000. Suppose the cost of building a house in this area is $330,000.

A wealth-creating transaction is not possible since the seller’s bottom line (or the cost of building the house) isError! Filename not specified.? ??the buyer’s top dollar. The difference between the cost of building the house minus the buyer’s top dollar is


Suppose the government subsidizes flood insurance for homes in the flood plain. Because of this, the buyer has access to very cheap insurance, worth an expected $60,000. Without such a subsidy, the high likelihood of flood results in extremely high rates for flood insurance.

With this subsidy, the individualError! Filename not specified.? ??incentivized to build a house in the flood plain.

4. Individual Problems 2-4

In 2013, France’s labor unions won a case against Sephora to prevent the retailer from staying open late and forcing its workers to work ?antisocial hours.? The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff who work the late shift are paid an hourly rate that is 25 percent higher than the rate paid to workers on the day shift. Many of the late-hour workers are students or part-time workers, who are put out of work by these new laws.

Forcing the retailer to close earlier forces the store’s assets, such as the building and merchandise, to be moved from ——(1)—–-valued activities to ——(2)—–-valued activities.

1.a. Lower

1.b. Higher



True or False: In order to profit from this law, an individual could purchase Sephora products during the day and sell them at a higher price during normal store hours.



5. Individual Problems 2-5

In 2009, when Kraft bid $16.7 billion for Cadbury, Cadbury’s market value rose. However, Kraft’s market value fell by more.?

The market believes that Kraft’s bid was ??(1)?. the present value of the expected future profits from Cadbury.

1. Less Than

2. Equal Too

3.Greater Than

6. Individual Problems 2-6

Two similar surgeries, breast reconstruction and breast augmentation, have different prices. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction following breast removal due to cancer is covered by insurance. The price of one of the surgeries has increased by about 10% each year since 1995, whereas the price of the other has increased by only 2% per year.

Breast ? (1)?? surgery likely has the lower rate of inflation, since insurance coverage offers a stronger incentive to undergo breast??(2)? , driving up prices.

1.a Reconstruction

1.b Augmentation

2.a Reconstruction

2.b Augmentation


Suppose you have won a free ticket to see a Bruce Springsteen concert. This ticket has no resale value.

Also suppose that U2 has a concert the same night. The U2 concert represents your next-best alternative activity to the Springsteen concert. Tickets to the U2 concert cost $20, and on any particular day, you would be willing to pay up to $151 to see U2. Assume that there are no additional costs of seeing either show.

?Based on the information presented here, the opportunity cost of seeing Bruce Springsteen is?$…..

2. Individual Problems 3-2

You purchased two tickets to an upcoming concert for $136 apiece when the concert was first announced three months ago. Recently, you found that similar seats were selling for $226 apiece when purchased on QuickTickets, a website where people can resell their tickets to others.

Based on the information presented here, the cost of attending the concert (for two persons) is?$ ?..

3. Individual Problems 3-3

You pay $15 for a movie ticket. Halfway through the movie, you believe that the movie is awful and will only get worse in the second half of the film. In order to get your money’s worth, you decide to stay for the remainder of the movie.

True or False: This is not an example of the sunk-cost fallacy.



4. Individual Problems 3-4

The expression ?2/10, net 45? means that the customers receive a 2% discount if they pay within 10 days; otherwise, they must pay in full within 45 days.

What would the seller’s cost of capital have to be in order for the discount to be cost justified?





5. Individual Problems 3-5

A local coffee shop is hoping to make use of its excess restaurant capacity in the evenings by experimenting with selling beer and wine. It speculates that the only additional costs are hiring more of the same sort of workers to cover the additional hours and costs of the new line of beverages.

Which of the following are examples of hidden costs that are likely to emerge from this decision??Check all that apply.

The forgone revenues that could be earned by renting the coffee shop out for other events during evening hours

1. Training costs for new and existing employees on beer and wine serving procedures

2. The cost of purchasing wine and beer to serve to customers

3. The cost of maintaining the machines that make the coffee

4. The cost of interviewing new employees

6. Individual Problems 3-6

Students doing poorly in courses often consider dropping the courses. Many universities will offer a refund if the student drops a course before a deadline.?

True or False: Prior to the deadline, students should?not?take this refund option into account when deciding to drop the course.



7. Individual Problems 3-7

A business incurs the following costs:


Labor: $180/unit


Materials: $95/unit


Rent: $200,000/month

Assume the firm produces 3 million units per month.

The total variable cost, per month, is $………..million.

The total fixed cost, per month, is $??…… million.

The total cost is$……….million.

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