Week 1

Say Sarah was choosing between three alternatives: working on her job that pays her $50; writing a term paper which she values at $60; or going out with a friend, which she values at $80. The opportunity cost of writing the term paper is:

$80

Marginal benefit

A _____ is a maximum amount a consumer is willing to pay for an additional good or service. It is also the additional satisfaction or utility that consumer receives when the additional good or service is purchased. The ______ for a consumer tends to decreases as consumption of the good or service increases.

Say you took an average of 20 minutes to answer an ECON problem, and 40 minutes to answer a MATH problem. If you had a limited time left to study, your best strategy would be to solve:

It depends.

You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your most attractive alternative. Tickets to see Dylan cost $40, but you are willing to pay up to $50 to see him. Assume there are no other costs to see either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (O, 10, 40, 50,none of the options?)

It is the difference between what I'm willing to pay (value) and what I had to pay (cost) which is: $10 (surplus)

You are an energy-conservation-minded consumer whose only goal in choosing a car is to minimize the depletion of the planet's store of fossil fuels. You usually drive an average of 7,000 miles every year. If gasoline is $1 per gallon, and if you can't afford to buy a new car: Should you rent a 40-year-old Buick ($100/yr, 20 miles per gallon) or a 10-year-old Toyota ($600/yr, 40 mpg)?

Not enough info but most likely the old Buick because presumably I don't drive a lot and I should leave the more efficient car for someone who drives more miles per year.

The Invisible Hand Principle

The ______ is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.

Say John was choosing between three alternatives: going to the beach, which he values at $50; washing his car, which he values at $100; or going out with a friend, which he values at $80. The costs of washing his car is:

The correct answer is: "$80." Since John can only do one of the three activities at the time, the cost of one activity must be the ONE activity that he would have done instead; not both. Since John values going out with a friend ($80), more than going out to the beach ($50), then if he does not wash his car he would probably go out with a friend. And again, since the value he has for going out with a friend is $80, that is the opportunity cost of going out with his friend. Again, the opportunity cost cant be $130 ($80 + $50) because he would not be able to do this two things (going out with his friend and going out to the beach) at the same time. Therefore, he cannot be giving up BOTH things by doing something else.

You can spend $100 on either a new economics textbook or a new CD player. If you choose to buy the new economics textbook, the opportunity cost is:

The correct answer is: "your enjoyment of the new CD player." Since we know you would have bought a CD player if you didn't buy the textbook, and since that would have cost you $100, the opportunity cost of buying the textbook would be the CD player (or the enjoyment you get from the CD player). The opportunity costs cannot be both the CD player and the $100 because you would not have been able to get the CD player AND keep the $100 if you didn't buy the textbook.

opportunity cost

When an option is chosen from alternatives, the _____ is the "cost" incurred by not enjoying the benefit associated with the best alternative choice.