Hours attended Total Benefit Marginal Benefit

0 0

______

1 400

______

2 700

______

3 900

______

4 1000

______

5 1000

Hours attended Total Cost Marginal Cost

0 0

______

1 25

______

2 75

______

3 175

______

4 375

______

5 1000

Hours Attende

d

Net Benefi

t

Total Benefit

Total Cost

0 ___ ___ ___

1 ___ ___ ___

2 ___ ___ ___

3 ___ ___ ___

4 ___ ___ ___

5 ___ ___ ___

Marginal Benefit

Marginal Cost

___ ___

___ ___

___ ___

___ ___

___ ___

1100

1000

900

800

700

600

500

400

300

200

100

0

800

700

600

500

400

300

200

100

0

Price Quantity Total MarginalDemanded Revenue

Revenue$450 0 $0

______

400 1 _____

______

350 2 _____

______

300 3 _____

______

250 4 _____

______

200 5 _____

Quantity Total Cost Marginal Cost

0 0______

1 250______

2 ____

______

3 ____

______

4 ____

______

5 ____

$250

Price Quantity Profit Total Revenu

e

Total Cost

$450 0 ___ ___ ___400 1 ___ ___ ___350 2 ___ ___ ___300 3 ___ ___ ___250 4 ___ ___ ___200 5 ___ ___ ___

Marginal

Revenue

Marginal Cost

___ ___

___ ___

___ ___

___ ___

___ ___

1400

1200

1000

800

600

400

200

0

300

200

100

0

-100

-200

-300

The following table gives the utility points received by a person from each additional hour of exercise per week, as well as the points that each additional hour costs. Using this table, answer the questions below.

a. Calculate the total benefit and the total cost of exercising for each of the hours in the table.b. Calculate the net benefit of exercising for each of the hours in the tablec. How many hours per week should this person exercise to maximize satisfaction?d. What is the maximum number of net benefit points that can be earned from exercising?

Hours of Exercise

Marginal Benefit

Total Benefit Marginal Cost TotalCost

NetBenefit

0 xxxxx 0 xxxxx 0  

1 60   5    

2 40   10    

3 30   20    

4 20   30    

5 10   40    

6 0   55    

Externalities

1. Cost to a third party

2. Benefit to a third party

sweater factory

beach

brewery

• Externalities exist when the market fails to register fully costs and benefits.

– External costs:• When the actions of an individual or group

incur a cost to 3rd party.

– External benefits:• Present when the actions of an individual or

group generate benefits for 3rd parties.

• All of the costs of production are not considered

• the supply curve understates the true cost of production.

• Lower production costs mean more output.

• Too many units are produced.• Pollution problems are often a side

effect.

• With a negative externality, too many units are produced at a price below that which would prevail if all costs were identified and factored into the market process.

Price

Quantity/time

P2

P1

Q1

D

S1

Q2

S2(including external costs)

Ideal price and output

Actual price and outputActual price and output

• The demand curve understates the total value of the output.

• Units that are more highly valued than their costs may not be produced.

• From society’s viewpoint, too few units may be produced.

• With a positive externality, too few units are produced at a price below that which would prevail if all the benefits were identified and factored into the market process.

Price

Quantity/time

P2

P1

Q1

D1

S1

Q2

Ideal price and output

D2(including external benefits)

Actual price and output

Study of economic motives and attitudes of voters and public officials in collective decision making.

• Maximizing Behavior and the Voting Process– A person’s decision about whether or

not to vote in an election depends on his or her marginal benefit and marginal cost of voting.

Public Choice 11-4

• Voters support candidates who will provide them with the most government services and transfer benefits, net of personal costs.

• Rational Ignorance Effect: Recognizing their vote is unlikely to be decisive, most voters have little incentive to obtain information on issues and alternative candidates.

• Because of the rational ignorance effect, voters will be uninformed on many issues; such issues will not enter into their decision making process.

Public Choice Analysis• Voter incentives:

– Rational Ignorance• Choosing to remain uninformed because the

marginal cost of obtaining the information is higher than the marginal benefit from knowing it.

– Special Interest Group• People who share a common position on a

particular issue and actively promote that position.

11-4

• The Politician-Supplier:• Political officials must win elections to be

successful and achieve their goals.

• Rationally uninformed voters often must be convinced to “want” a candidate. $$$

• Legislative bodies are something like a Board of Directors. They …•establish the general direction of policy, •appoint and supervise bureaucrats who

carryout the day-to-day operations of government, and,

•set the budgets of agencies and bureaus.

Public Choice Analysis

1. To maximize satisfaction this person should consume:a. 2.5 units d. anywhere between 1.0 and 6.0 unitsb. 6.0 units c. more than 6.0 units.

2. From 0 to 5.0 units consumed, net benefit is:a. increasing. c. increasing and then decreasing.b. decreasing. d. decreasing and then increasing.

3. When calculating profit accountants include:a. explicit costs. c. explicit and implicit costs.b. implicit costs. d. explicit, implicit, and external costs.4. Excess profit is the profit:a. necessary to continue a business.b. necessary to recover explicit costs.c. necessary to recover implicit costs.d. above what is necessary to continue a business.

Quantity Total Revenue

1 $2002 $3503 $4504 $500

5. Given this table, what is the marginal revenue generated when the third unit is sold?

a. $50. b. $100. c. $110. d. $150.

6. An externality is the:a. secondary effect of an action.b. unintended consequence of an action.c. effect of an action on people or things that were not involved in the

action.d. unknown consequence of an action on people or things who were primary parties in the action.7. Which of the following is an example of a positive externality?a. A person paints her house, which increases the value of her neighbor's house.b. A firm pays higher prices for resources, which increases its explicit

costs of production.c. A firm dumps toxic waste in a river, which causes a community to raise taxes to clean the water.d. None of the above.

8. Which of these would be most likely to produce a negative externality?a. exercise. b. foreign aid.c. air pollution. d. vaccinations.