Jane is deciding whether to go to school for 8 weeks this summer. The cost of tuition and textbooks is $1,700 and housing and other expenses will cost her $600
If she does not go to school, she will live in her parents' house for free and they will cover her food and other expenses for her. Also, if Jane does not go to summer school she could work fulltime. But the best job she can get pays only $600 per week, and Jane would only agree to give up her free time for no less than $750 per week. However, if she goes to summer school, she'll have to spend 40 hours a week attending classes and studying. a) What will the summer school cost Jane in terms of money spent? b) What are the opportunity costs of going to summer school that Jane does not pay explicitly? Explain. c) What is Jane's total opportunity cost of going to school this summer? Explain your answer. d) Suppose that if Jane does not go to summer school, she will eventually take the classes anyway. What is Jane's marginal benefit of going to summer school? e) Suppose Jane decides to go to school in the summer. Explain her decision using the concepts of marginal cost and marginal benefit.
a) Jane explicitly pays the cost of tuition and textbooks ($1,700 ) and the cost of housing ($600 ), so her total explicit costs are $2,300.
b) Jane's opportunity cost is what she gives up (her best alternative forgone) to go to summer school. In this case she forgoes 40 hours per week of her free time, which she values more highly then the income from the best job she could find. To place a dollar value on this time, notice that the value that she places on this time is the amount of money she is willing to accept to give it up: $750 per week. So for the eight weeks, her free time has a value of $750 × 8 = $6,000. Although she does not pay $6,000 explicitly, she gives up this value of her free time and hence it's an opportunity cost to her.
c) Jane's total opportunity cost includes the cost that she pays explicitly, $2,300, which she has to pay only if she goes to school. Also, as explained in the previous part, Jane is giving up the value of her free time, $6,000. Thus, her full opportunity cost of going to school is $2,300 + $6,000 = $8,300.
d) Jane's marginal benefit of going to summer school is the possibility of getting her degree faster. For instance, if the summer school allows her to graduate one semester earlier, she can start to work and earn income earlier. The additional income and work experience that she gets because of her earlier graduation is what she gains if she decides to go to school in the summer.
e) Jane decides to go to school in the summer if her marginal benefit from this decision, the value of extra income and work experience that she gets if she graduates earlier, is greater than the marginal cost of her summer school, $8,300.
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