1. Suppose for a student producing \"Study Hours\" Q. Total Benefit40Q, and Tota
ID: 3362656 • Letter: 1
Question
1. Suppose for a student producing "Study Hours" Q. Total Benefit40Q, and Total Cont 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 to per- cent of its actual 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 outcornes in #1 and #2? why? what can you conclude about the effects of interest rates on choices and decisions?Explanation / Answer
Net Economic Benefit = Benefit - Cost of studying.
= 40 Q - 2.5 Q2
Thus, Maximizing the Net Economic Benefit =
Max (40Q - 2.5Q2 )
To find the inflection points, equate the polynomial to zero.
Thus,
40 Q - 2.5Q2 = 0
Q = 40/ 2.5
= 16 .
Thus to maximize the Net Economic Benefit of studying, the student have to study for 16 hours.
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