Hello, I need some assistance with question 2, part b. Thank you.
2. Stan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates that it will cost him $10,000 to purchase, repair and restore the car, and that he can sell the finished car for $13,000. When he has spent a total of $10,000 on the project, he discovers that he needs to replace the engine. It will cost Stan $4,000 to replace the engine. He can sell the car without the new engine for $9,000. What should he do? Use marginal analysis to answer this following. Remember that "cost" refers to "economic cost" and that means the cost of all resources including the cost of owner supplied inputs. The following steps will help you. a. Stan has already spent $10,000 and therefore this is a sunk cost. At this point he has two options. Option A involves selling the car as is, without the new engine. i. What is the incremental (or marginal) cost of this option, i.e. will he have to fork out any additional cost? ii. What is the marginal benefit, i.c. how much will Stan get if he sells the car as is? iii. Compare the marginal cost and marginal benefit to determine the net effect. .. . . .. Ten Principles of Economicsb. Option B involves replacing the engine and then selling the car. i. What is the incremental cost of this option? ii. What is the marginal benefit? iii. Compare the marginal cost and marginal benefit to determine the net effect. c. Now compare options A and B to determine Stan's best course of action. 3. For each of the following, indicate whether the event is motivated by efficiency or equity concerns. a. Regulating cable television prices efficiency b. Providing the poor with vouchers that can be used to buy food equity c. Prohibiting smoking in public places efficiency d. Breaking up Standard Oil (a corporation with monopoly power) into several smaller companies efficiency e. Progressive income tax system equity f. Instituting laws against driving while intoxicated. efficiency