Question

You are given an old car by your uncle, who wants you to keep it in working condition so that you can hand it off to your younger brother in three years. It will cost you $1,500 per year to keep it in working condition for your brother. If you skip maintenance altogether, the car will die after two years, but you can pocket the maintenance costs.

a. What will you be tempted to do?

• Not do the maintenance, because the MC < MB of doing the maintenance and the MC > MB of doing the maintenance.

• Do the maintenance, because the MC < MB of doing the maintenance and the MC > MB of doing the maintenance.

• Not do the maintenance, because the MC < MB of doing the maintenance and the MC > MB of doing the maintenance.

• Not do the maintenance, because the MC < MB of doing the maintenance and the MC < MB of doing the maintenance.

b. Would higher maintenance costs make you more or less likely to do what your uncle wants?

• More likely, because the MB of not doing the maintenance rises and the MC of doing the maintenance also rises.

• More likely, because the MB of not doing the maintenance falls and the MC of doing the maintenance also falls.

• Less likely, because the MB of not doing the maintenance falls and the MC of doing the maintenance rises.

• Less likely, because the MB of not doing the maintenance rises and the MC of doing the maintenance also rises.

Answer 1

a) The correct option is 2.

1) The person will do the maintenance because the marginal cost of doing the maintenance is less than the marginal benefit and not more.

2) The person will do the maintenance because marginal cost of maintaining the car is less and marginal benefit of maintaining it is more. Also the person can afford it. So he will do the maintenance.

3) The person will do the maintenance because the marginal cost of not maintaining the car is more than maintaining the car.

4) The person will do the maintenance because marginal cost of not maintaining the car is more than the marginal benefit of not maintaining the car.

b) The correct option is 4.

1) The person will not become more likely if the costs of maintaining the car increases as it will increase the marginal cost.

2) The person will not be more likely because maintenance cost increasing will increase the marginal cost also.

3) The marginal benefit of not maintaining the car will increase instead of decreasing if maintenance costs increase.

4) The marginal benefit of not maintaining the car will increase and the marginal cost will fall if the maintenance costs increase.