Monday, September 28, 2009

They're in Hot Water Now!

Last year Antoine and Antawn occupied separate apartments; each consumed 300 gallons per month of hot water. This year they are sharing a larger apartment. To their surprise, they find that they are consuming 1000 gallons per month. Explain.

Monday, September 21, 2009

Dallas Cowboys Stadium

The new Dallas Cowboys Stadium got me thinking: At a football stadium where some fans live nearby and others travel great distances to attend, where would you expect to find a higher percentage of long-distance travelers: in the cheap seats or in the expensive seats? Why?

Monday, September 14, 2009

Farm Decisions

An economy consisting of farms has the unusual production function for each farm as described in the table below. Apparently with an even number of workers, they play cribbage.

Number of Workers Marginal Product
1 20
2 15
3 19
4 14
5 18
6 13
7 17
etc. etc.

If you had 10 farms and 40 workers, how would you allocate them among the farms? How much total output would your farms produce? Explain.

Congratulations to Qi Wu for being the first to come up with a correct answer to this week's question. Read her answer (spread over two comments) in the comments section.

By the way, thanks to the late George Stigler for the above question.

Monday, September 7, 2009

Marietta Armory Square

The city of Marietta is currently debating the future of the old Armory building on Front Street. Suppose that the mayor has proceeded with his plans to refurbish the building and use it as a transportation hub and visitor center. The estimated cost to complete the museum was initially $1.6 million. The mayor also believes that the transportation hub will generate an estimated benefit of $2.4 million.

The benefit estimate appears to be correct, but costs to date total $2.7 million, and the transportation hub still is not ready. The cost of completing the transportation hub, X, is uncertain.

City Council member Flintstone wants to stop now: "Whatever the value of X, it is clear that the transportation hub will yield negative net benefits." Council member Rubble wants to continue: "If we stop now, we will have wasted $2.7 million."

Comment. How should the decision depend on the value of X?

Congratulations to Kaitlin Huck for being the first of three to submit a correct answer. Using marginal analysis, the decision on whether to continue the project or not hinges on the value of X, the cost of completing the project. The $2.7m costs to date are sunk costs and should not affect the decision to continue or stop the project.