Question

1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: Allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain.

2. Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.

3. What is meant by the term “utility” and how does the idea relate to purposeful behavior?

Answer 1

An opportunity cost is what was sacrificed to do or acquire something else. The condition of scarcity creates opportunity costs. If there was no scarcity, there would be no need to sacrifice one thing to acquire another.

The opportunity cost would be much higher in New York City as the alternative uses for that square block are much more valuable than for a typical suburban city block.

2.Three examples as follows:-

Marginal cost can be defined as the cost incurred in producing or buying one additional unit of product while marginal benefits can be defined as the benefits received on producing or buying one additional unit of product.

Recently I went to a retail outlet to buy some grocery. When I started to pick the general stuff such as sugar, flour and rice separately, It was costing me $50 . When I went ahead I saw a sales promotion offer was running in the outlet where if I buy one more additional unit of sugar, I would receive $5 worth of stuff. When I estimated, that on buying one additional unit of sugar, I would spend $12 and in return I would get some stuff of $10. This way I analyzed that marginal cost of buying one additional unit of sugar will provide me the marginal benefit of $10. Thus I decided to buy additional unit of sugar.

In movie center, when I was buying popcorn and cola, the boy at counter offered me that if I would buy one more medium popcorn worth $5 ten I would get an ice-cream of $1 free. In this case, I had to pay $5 to get $1 worth of ice cream. In this case, I did not accept the offer as marginal cost was more than the marginal benefit.

My family planed a trip to Disneyland. We bought were in confusion whether to buy a 3 day pass to Disneyland or a 5 day pass. In order to decide this , we estimated then the marginal cost of the 5 day pass (whatever the difference in price plus two more nights of hotel and food) which came out to be more than the marginal benefit (the extra fun of having two more days there). Thus we decided to buy a 3 day pass.

3.Utility is nothing but the level of satisfaction that you are going to have after having the good.And this level of satisfaction in economics is meseaured in utils.Higher the utility higher the intension to purchase the product.For exmple.A man is hungry and he is given two choices.He can eat either burger or he can have enough rice.If the level of satisfaction received from having rice is greater than the level of satisfaction provided by the burger then definetely he will go for having rice.Utility is not a desire.Utility is something that is derived after (or sometime already predetermined before) having the good.

3.Utility is related to purposeful behaviour in the sense that they are going to buy goods of their choice based on thier income inorder to maximize the level of satisfaction they will have after consuming those particular goods.The concept of utility inculcates a behaviour in them that they should and must be buying such goods in such quantity so that will lie on the higher indifference curve.