Question

1. Working with Numbers and Graphs Q1 Suppose the marginal costs of reading are constant at $6 per hour, while the marginal benefits of reading decline (over time) as more reading is performed. In particular, suppose the following table contains the marginal benefit associated with various levels of hours spent reading Time Spent Reading Marginal Benefits (Hours)(Dollars per hour) 10 16 40 Assume the marginal-benefit curve is a straight line through the two points described in the table on the following graph, use the blue points (circle symbol) to plot the marginal-benefit curve for reeding. Next, use the orange points (square symboly to plot the marginal-cost curve for reading. Finaly, use the black point (plus symbol) to indicate the point corresponding to the efficint amount of reading (that is, the point at which the net benefits of reading are maximized)

Answer 1

Solution:

Q1) We are given the marginal cost (MC) of reading is fixed at $6. So, for any number of reading hours, we have the same MC, indicating that MC is a straight horizontal line with vertical intercept as at 6. From the table, when 10 hours are spent on reading, marginal benefit (MB) derived is worth $16, while as the number of reading hours increase to 40, MB declines to $4, so the two points joining the MB curve (straight line) are: (10, 16) and (40, 4). Finally, efficient point is obtained where the two lines intersect.

Accordingly, we have the following graph:

Clearly, from the graph above, at any level of reading below efficient level, the marginal benefit curve (represented by blue line) is above the marginal cost curve (represented by orange line). This means that marginal benefits of reading are greater than the marginal costs of reading, and therefore you can increase net benefits by reading for more hours. On the other hand, at any level of reading greater than the efficient amount, the marginal benefit curve is below the marginal cost curve. This means that marginal benefits of reading are lower than the marginal costs of reading, and therefore you can increase net benefits by reading for fewer hours. Only at the efficient point, where marginal benefits are equal to the marginal costs of reading are net benefits maximized.

Q2) Initial MC is fixed at $15 (as denoted in the graph by orange horizontal line, MC). Increase in MC is denoted by the upward pointing arrow in the figure, thus new marginal cost curve is represented by MC'.

MARGINALB COST MARGINAL BENEFIT 27 (Ss per hour of reading per week) 24 30 MC 21 Change in net benefits 18 MC 15 12 MB 12 15 18 21 24 27 30 READING (Hours per week)

We represent the initial efficient point by C and new efficient point by E. Clearly, point E indicates a lower number of reading hours than C. So, after the increase in the marginal cost of reading, the new efficient level of reading is lower than it was previously. From the figure we can see that initially, net benefits from reading is represented by triangle ABC. After the marginal costs increased, the net benefits became equal to area of triangle DEB. It is evident that triangle DEB is smaller than triangle ABC, so the net benefits associated with the efficient level of reading have reduced.

Q3) Since, Jim chooses to undertake some level of the activity X, we require that X be greater than 0 (that is, efficient level of X carry some positive value). As we have learned till now that the efficient point occurs at the intersection of marginal benefit and marginal cost curve, noticing the two graphs provided, clearly intersection of curves at positive value of X takes place in graph A. Thus, graph representing Jim's marginal benefit and marginal cost curves is Graph A.