In-Class Exercise No.

1
1. Jane has compiled the following list of expenses after completing one year of college. Assume
that Jane would be living with her parents and working if she weren't attending college. Use this
information to calculate Jane's economic cost of attending college for one year.
Tuition
Dormitory room
Books and supplies
Food plan
Forgone income
Entertainment expenses
Clothing
Health insurance

$ 8,000
4,000
1,000
3,000
19,000
1,000
2,000
1,000

3. Climate Control Devices, Inc., estimates that sales of defective thermostats cost the firm an
average of 25 each for replacement or repair. An independent engineering consultant has
recommended hiring quality control inspectors so that defective thermostats can be identified and
corrected before shipping. The following schedule shows the expected relation between the
number of quality control inspectors and the thermostat failure rate, defined in terms of the
percentage of total shipments that prove to be defective.
Number of
Inspectors
0
1
2
3
4
5

Quality

Control Thermostat
(percent)
5.0
4.0
3.2
2.6
2.2
2.0

Failure

Rate

The firm expects to ship 250,000 thermostats during the coming year, and quality control
inspectors each command a salary of 30,000 per year.
i. Construct a table showing the marginal failure reduction (in units) and the value of these
reductions (in Pound) for each inspector hired.
ii. How many inspectors should the firm hire?
iii. How many inspectors would be hired if additional indirect costs (lost customer goodwill and
so on) were to average 30% of direct replacement or repair costs?
4. The demand for housing is often described as being highly cyclical and very sensitive to
housing prices and interest rates. Given these characteristics, describe the effect of each of the
following in terms of whether it would increase or decrease the quantity demanded or the
demand for housing. Moreover, when price is expressed as a function of quantity, indicate
whether the effect of each of the following is an upward or downward movement along a given

demand curve or involves an outward or inward shift in the relevant demand curve for housing.
Explain your answers.
A.
B.
C.
D.
E.
F.

An increase in housing prices

A fall in interest rates
A rise in interest rates
A severe economic recession
A robust economic expansion
A rule that bank should offer loan based on net income rather than gross
income.