1. Suppose for a student producing \"Study Hours\" Q. Total Benefit-40Q, and Tot
ID: 1102410 • Letter: 1
Question
1. Suppose for a student producing "Study Hours" Q. Total Benefit-40Q, and Total Cost = 2.5Q2. Assume that the student is rational, that the Total Benefit and Total Cost of Q are the "actual" Benefit and Cost of studying, and the student desires to maximize the Net Economic Benefit of studying. How many hours will the student spend studying? Why? 2. Suppose the student in #1 underestimates the benefit of studying such that it is 50 per- cent of its ac tual benefit, as a result of overconfidence in his ability to successfully negotiate exams in the absence of studying. How many hours will the student spend studying? Why? In what sense is this situation a departure from the rationality assumed in #1? 3. Refer back to #1. Suppose the student has a girlfriend that values spending time with him, whom he loves and cares about dearly, and there is a 50 percent chance she values each hour of his time at $3. How many hours will the student spend studying? Why? In what sense is this situation a departure from the rationality assumed in #1? 4. Suppose the decision problems in #1 and #2 constituted two projects that would begin one year from now. What positive interest rate would make you indifferent between the outcomes in #1 and #2? why? What can you conclude about the effects of interest rates on choices and decisions?Explanation / Answer
1. A rational student would want to maximise the net economic benifit from studying. The benifit will be maximum when actual benifit of studying is equal to total cost of studying.
Equalting total benifit and total cost, we have
40Q=25Q2
16Q=Q2
Q(16-Q)=0
Q=0 OR Q =16
The student will study for 16 hours to maximise his benifit of studying as when he spends 16 hours studying his economic benifit of studying is maximum.
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