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Economics Questions:

1. Using optimization theory, analyze the following quotations: a. "The optimal number of traffic…

Complete Question Text:

1. Using optimization theory, analyze the following quotations:

a. "The optimal number of traffic deaths in the United States is zero."
b. "Any pollution is too much pollution."
c. "We cannot pull U.S. troops out of Iraq. We have committed so much already."
d. "If Congress cuts out the NASA space station, we will have wasted all the resources that we have already spent on it. Therefore, we must continue funding it."
e. "Since JetGreen Airways has experienced a 25 percent increase in its insurance premiums, the airline should increase the number of passengers it serves next quarter in order to spread the increase in premiums over a larger number of tickets."

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Asked on May 22, 2013, 6:34 a.m.
Dan W. Tutors Economics + 24 others
Yale University 2015 - Cognitive Science
"Since my first semester at Yale, I've loved tutoring students weekly at a local organization "New Haven Reads." I've been..."

1a/1b: These two questions get to the distinction between minimum and optimum. Certainly, having zero pollution and zero traffic deaths seems like the best outcome, but what does that mean for transportation and production? Likely that means that there is zero production and zero cars on the road, which doesn't seem like a good outcome at all. If you remember from taxation unit (Piguvian tax), the optimal output when there is pollution is less than the market output, but it is certainly more than zero.

1c/1d: These two questions get to the idea of the sunk cost fallacy. The sunk cost fallacy is that previous economic decisions impact current ones. For instance, if I purchased a movie ticket yesterday for a movie tonight, I might be inclined to go to the movie even if I wanted to stay home because I spent the money. But either way (whether you stay home or go to the movie) you have spent the cost of the ticket, and you should always just decide what is the best decision for you in the moment independent of previous expenditures.

1e: JetGreen Airways certainly has to increase its revenue to compensate for the increased costs associated with the insurance premium. Increasing the number of passengers is certainly one way. There are other ways to increase revenue -- they could increase ticket prices to compensate for the increased costs as well.

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