1. Tina hires leff to do odd jobs around her horne and agrees to pay him $5 per

Question

1. Tina hires leff to do odd jobs around her horne and agrees to pay him $5 per hour'

Tina further agrees to guarantee Jeff at least 40 hours of work per week' and to pay

him l,5 times his base pay for any hourswor kedbeyond 40. If Jeff works 45hours

this week,are his wages a fixed cost or a variable cost toTina? Explain.

2. Imagine that you're on vacation in Russia, when suddenly you're arrested and accused

of spying for the United states. (You',re innocent, of course') Your captors inform

you that if you confess, you'll receive a prison sentence of two years/ while your

co-conspirator (whom you've never heard of) will receive a prison sentence of twenty

years. If you both confess, you'll each receive a prison sentence of five years' You're

also told that your co-conspirator is being offered the same option' if you both maintain

your innocence, howevel there's not enough evidence to convict either of you'

Applying economic theories to the problem, what should you choose to do, and why?

3. A hotel owner, having heard that new hotels plan to open in his area, says, "we have

too many hotels in this town already. Statistics show that vacancy rates average 20

percent on any given night." Assuming this is correct, evaluate his negative assessment

of the situation in terms of business-stealing and product-variety externalities.

Explanation / Answer

1. Fixed cost is $5*40 = $200

Variable cost id what Tina pays for hours over and above 40. So variable cost in this is $25*5 = $125

2. This is prisnor's dilemma. Fearing that the other person might not confess in which case it would be worse, the prisnor will confess, though both will be better off if both did not confess.

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