Use the principle of marginal benefit and marginal cost to answer the following questions. Be sure to explicitly state the marginal cost and marginal benefit.
a. Katie is planning to sell her house, and she is considering making two upgrades to the house before listing it for sale. Replacing the carpeting will cost her $2, 500 and replacing the roof will cost her $9,000. Katie expects the new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by $7,000. Should she undertake either of the projects? Why?
b. Peter buys and sells real estate. Two weeks ago, he paid $300,000 for a house on Pine Street, intending to spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Peter purchased. As a result of the city's announced plan, Peter is weighing two alternatives: He can go ahead with the $50,000 in repairs and then sell the house for $290,000, or he can forgo the repairs and sell the house as it is for $250,000. What should he do?