Problem_Set_2_Scarcity_&_Opportunity_Cost

Problem_Set_2_Scarcity_&_Opportunity_Cost - 33...

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Unformatted text preview: 33 Problems on Scarcity, Opportunity Cost, Specialization & Trade 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? 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? 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? 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? (ii) Which task is Esmeralda’s economically rational choice? (iii) What is the opportunity cost of each of Esmeralda’s four tasks? Table 2.2: Esmeralda’s Opportunity Costs Task Value Opportunity Cost Eating $15 Errand $12 Office Work $8 Lawyer $14 (iv) Which of Esmeralda’s tasks has the lowest opportunity cost? (v) What is the connection between Esmeralda’s economically rational choice and the task that inflicts upon her the lowest possible opportunity cost? Why is this so? Problem 2.5. Now let us think about a new and improved Esmeralda. She has the same list of tasks as in Problem 2.4 and her valuations of these tasks are the same. The difference is that she now can do any one of these tasks in only thirty minutes. She still has only one hour available to her. (i) Which two tasks will an economically rational Esmeralda choose to do? 34 CHAPTER 2. SCARCITY, OPP. COST, SPECIALIZATION & TRADE (ii) What is the payoff to Esmeralda from her rational choice? (iii) What is the opportunity cost to Esmeralda of her rational choice? (iv) Does Esmeralda’s economically rational choice minimize her opportunity cost of using her hour of time? Table 2.3: Esmeralda’s New Opportunity Costs Choices of Two Tasks Choice’s Value Choice’s Opportunity Cost Eating & Errand Eating & Office Work Eating & Lawyer Errand & Office Work Errand & Lawyer Office Work & Lawyer Problem 2.6. You have a ticket to go and see the Bison’s game this weekend. You bought the ticket last month and paid $20 for it. Attending the game has a value to you of $40. However, you have just been invited to participate in a business meeting that will have a payoff to you of $50. Unfortunately the game is at the same time asthat will have a payoff to you of $50....
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Problem_Set_2_Scarcity_&_Opportunity_Cost - 33...

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