Question

1) Describe a time you worked on a project that was successful but not worth the time spent on it. How does this illustrate the importance of understanding opportunity costs?

2) Have your purchase decisions ever changed when you discovered a good or service was more or less expensive than expected? Relate this to income & substitution effects. How might a change in price differ from a change in your income?

Answer 1

1.Opportunity cost is the value of next highest alternative value of the resources. The simple example, if I am spends time and money going to a movie. I missed the time which spend for reading a book at home. The next best alternative to seeing the movie is reading the book. So the opportunity cost of movie is the money spends with the pleasure you get without reading the book. Here I worked on project and I get successful result, but there is a time constraint occurred here. Assume that I have 6 days to complete the project. In the first day, I completed the introduction section. In second day, I did not do anything regarding the project. So I spend the second day to do some assignments. In the third day I revised the introduction part and make some editing, only spend three hours in that day for the project work. In the fourth day, I just read some article related to the project topic. In between the reading I watched one movie also. In the fifth day I make a brief write up about the concept with regarding the information I get from the article that I read last day. In the final day I will become more nervous about the project and also afraid about the conclusion that gets from the study. I spend almost 9 hours in that day to complete may work.
From here we can find that if I spend the 6 days very efficiently I can derive a better result from this. During the 5 days I get more opportunity cost from doing other things than the project work. But in the last day, the work finished in 9 hours. This shows my preference towards the interest with respect to the time.
2.There are two major effects in price effect; income effect and substitution effect. If the price is less than expected level, the consumer will consume more and this will increase the satisfaction or utility level. Budget constrain played an important role in the consumption bundle. Income effect through the increase in price level will increase the demand for that commodity. The consumer will buy more amounts of that good. On the other hand, the consumer will substitute high price products for purchasing these low price goods. This shows a substitution between different goods on the basis of their prices. So the demand for these low price goods increased in the market. The fall in price will increase the level of disposable income and also increase the demand in the market.