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Unformatted text preview: 39 Answers to Problems on Scarcity, Opportunity Cost, Specialization & Trade Answer to Problem 2.1. Suppose you have a spare lawnmower that you never use. You give it as a gift to your favorite cousin. Does giving away the lawnmower have an opportunity cost of zero? Answer: No, the opportunity cost of the act of giving the lawnmower is positive. Why? Instead of giving the lawnmower away you could have sold it, or given it to some other person, or perhaps used its motor to make a go-cart. Each of these alternatives has a positive value, which is foregone when you give the lawnmower to your cousin. The largest of these foregone values is the opportunity cost of your gift. Answer to Problem 2.2. From time to time the USA dips into its stockpiles and donates food, medicine and so on to countries that have suffered a disaster such as a famine or an earthquake. From the point-of-view of the USA, are such donations free in the economic sense? If not, then what is the USA’s economic (opportunity) cost of such a donation? Answer: The donated commodities each have valuable alternative uses. For each commodity, the value of the most valued of these forgone alternatives is the oppor- tunity cost of donating it. Add up these opportunity costs over all of the donations and you have the opportunity cost of the total donation. Answer to Problem 2.3. A person volunteers an hour of labor without pay as a charitable act. Is this hour of labor without value? Is the hour of labor economically costless? If not, what is its cost? Answer: The value of the hour of donated labor is the value of whatever is produced in that hour. The fact that no wage is paid has nothing to do with the value of the donated hour. For example, if the volunteer sat down to help another person improve his reading skills then the value of the hour is the value of the extra productivity of the person. The economic ( i.e. the opportunity) cost of donating the hour is positive since the volunteer could have done something else with that hour that is of value to him or her; e.g. rest, read the newspaper, earn wages, walk the dog, etc. ) The opportunity cost of volunteering the hour of labor is the foregone value of the volunteer’s most valuable alternative use of the hour. Answer to Problem 2.4. Esmeralda can do only one thing in her lunch hour. Her alternatives are eating, running an errand, catching up on some office work, and consulting her divorce lawyer. Her monetary valuations of these tasks are respectively $15, $12, $8 and $14. (i) Which task gives Esmeralda her highest payoff? Answer: Eating. (ii) Which task is Esmeralda’s economically rational choice? Answer: Eating. 40 CHAPTER 2. SCARCITY, OPP. COST, SPECIALIZATION & TRADE (iii) What is the opportunity cost of each of Esmeralda’s four tasks?...
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This note was uploaded on 03/01/2011 for the course ECO 182 taught by Professor Morgan during the Spring '08 term at SUNY Buffalo.
- Spring '08
- Opportunity Cost