Question

Use the ideas of opportunity cost, marginal analysis, and sunk cost to give advice to the following people:

a. When Ursula goes to an all-you-can-eat buffet, she eats so much that she is sick for two days. But she says it’s OK, because it didn’t cost her anything extra. Your advice?

b. Victor is thinking about starting a small business selling baseball caps in the shopping mall. He tells you that if he makes a financial investment of $10,000 and works full-time for a year, he can earn $20,000 per year. Since the gain of $20,000 exceeds the $10,000 he invests, this seems like a good idea to him. Your advice?

c. Xavier works at a U.S. post office in a large city, which is located in a lovely old building in a prime downtown location. He says that it’s a great deal, because the building was bought and paid for many years ago and so it now has zero cost. Your comment?

d. Yolanda works for a company that spends $20,000 on surveys to decide whether to launch a new product. Then it decides that it needs to launch the product to earn back the money it spent on the surveys. Your advice?

e. Zachariah decides that his favorite food is grapes; therefore, he decides that he will eat nothing but grapes from now on. Your advice?

Answer 1

a) Ursula should understand the use of oppurtunity cost as she has got not no benefit by eating but getting ill. As she is ok right now it does not mean she is ok may be it may have so impact on her. If the problem became serious than it should have cost her more than the buffet cost she paid by getting to a doctor a treatment.

b) Victor should understand the concept of sunk cost where the future cost may be changed or incuured and these change can be fixed or variable. He should think all these aspects by analyzing the demand and market for the product he is selling or he will face losses.

c)As there is no benefit with that building it is an oppurtunity cost which is used for many years.

d) Yolanda's company should know marginal analysis analysis of cost and benefits is necesary as he is expanding or launching a new product.So he should know the manufacturing cost, labour cost or any additional costs etc.

e) Zachariah is taking oppurtunity cost where he is taking a decision between two different products. My advice is that he should think once again as everytime he cant eat grapes every day. So he should also think about various constraints involving with his decision