Week 1 Chapter 1 Question 17
People join tennis clubs for a fixed fee per year, which entitles them to play as much as they want without charge. Because people who pay these fees play more tennis than others (who can use free public courts), this means sunk costs matter for decisions. Right?
Sunk costs are past costs that have already been made and cannot be recovered. These costs greatly affect the decisions of the person who made those costs because many humans tend to avoid loss and thus act irrationally when making decisions.
When People join tennis clubs, their initial intention is to visit the club regularly and make use of the tennis courts and facilities whenever they wanted. Having a membership gives them access to a tennis court at short notice and also opponents in the form of other members who come there to play.
Whatever be the initial intention of the person who paid for the membership, later he feels more obligated to go and play at the club. More so than the person who use free public courts. Sometimes he feels compelled to go to the club even if he thinks he better spend his time somewhere else, if only for the sole reason that he paid for the club.
This shows that sunk costs do matter for decisions.
Week 1 Chapter 1 Question 2
When discussing the maximization of utility, regardless of whether you chose to work more hours or fewer when offered a higher hourly wage, you could not be worse off than you were at a lower hourly wage. Can you show this?
Suppose I am currently working for $40 per hour and my wages have been increased to $45. I am also given option to determine the number of hours I work. By working 40 hours per week at the rate of $ 40 per hour, I am earning $1600 per week. When my wages increased, I am making $5 more per hour. And working the normal hours I make $ 200 more per week. I may choose to work the same number of hours and earn $200 extra, or I may choose to work more hours thus earning more than $1800 per week. Or I can also choose to work lesser number of hours , say 36 hours, earn $1620 ($20 extra) and still have 4 hours leisure to pursue my hobbies or just relax.
So regardless of choosing to work more hours or fewer, I could not be worse off than when I am at a lower hourly wage.
Week 1 Chapter 2 Question 1
How does the existence of money reduce the costs of making transactions, relative to a society based entirely on barter? English is becoming the usual language for international transactions, even if the language of neither country is English. How does this reduce the costs of transacting?
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services. This system would be most successful if the two people who are making the barter have what the other person desires. If suppose A needs what B has But A doesn’t have what B needs, then A will have nothing to barter B with. Then C comes along with the items that B wants but he needs what A has. And each of A,B, C may have different opinions of the worth of the items they possess. Without a common denominator, it will be difficult to make a trade that is satisfying to everyone because in the real world there are more people than just A, B and C. Having money easily solves this problem. Since everyone wants money and can easily exchange it to get the product of their choice, one does not need to carry all the varieties of goods with him to make a barter to get what he wants. Just carrying a small amount of money is sufficient.
Coming from a country where every state has its own language, and even in a single state, where the dialects vary from county to county, I can fully appreciate the importance of having a common language to communicate and carryout transactions. If there is no such common language like English, we will have to pay a translator to be the intermediary and help to complete to transaction. So knowing English reduces the cost of transaction.