Homework: Intro to Econ

Anthony DeLorenzi

Microeconomics (ECON&201)

Unit 1 Homework

1 If I was planning to spend my Saturday working at my part time job, but then a friend
asks me to go skiing, I must think about the “true costs” of each choice. True cost is
defined by economists as “the difference between the market price of a commodity and
the comprehensive cost of that commodity to society” (Coil, 2012), but I think a little
more must be taken into consideration. If we compare the benefits and costs of each, also
known as performing a “cost-benefit analysis”, we can make a better judgement. The
benefit of going skiing is that I get to spend time doing something I enjoy with my friend.
This can alleviate stress and increase my satisfaction with life. The benefit of working on
the other hand would be to earn wages which would help me pay for the various things
that I require, or possibly even to put towards recreation. Therefore, the opportunity costs
would be the benefits of the option that I do not choose. In addition, there is a small cost
to society should I choose to go skiing. If I pass up on the opportunity to work, society at
large is affected by there being one less person at my job. As a part-time grocery clerk, I
know firsthand just how much one worker’s absence can affect the other workers at an
establishment, as well as the customers. When someone in my department is absent, the
other workers must work twice as hard to accomplish the same job. The customers must
often wait longer, or spend more effort finding an employee to answer their questions.
This all comes as a cost to society, should I spend the day skiing. Now let’s imagine I
was planning instead to spend the day studying at the library. The true cost of skiing in
this case would be the potential knowledge I could have gained by studying. This differs
from the cost of working because instead of giving up on the chance to earn money, I am
giving up on the chance to improve my chances in school, which may or may not be even
more costly than money.
2 Opportunity cost is defined as “the sacrifice that society makes when a certain good or
service is produced” (McConnell et. all, 2012). The sacrifice is the next best thing that
would have been available if society was to make a different decision. An example of
opportunity cost may be made using the skiing example from earlier: if I choose to go
skiing, the opportunity cost is the sum of wages that I might have earned had I instead
chosen to work. Let’s take another example: if I decide to go to a free dinner at school,
economists will say that this is not free. It is not free for me because there are other,
possibly more efficient ways of spending my time, and it may not be free for society
either because the food that I eat will be unavailable to the other members of society.
This thinking does make sense to me, because it is a more complete analysis of my
decision. The best analysis of a choice is the one that takes the most variables into
account because we can have the most accurate idea of the benefits and costs of such a
choice.
3 If behavior is guided by rational self-interest, it might seem odd that anyone would make
a charitable contribution. Any resources given to charity will never be repaid, the
resources are gone forever. So why would anyone make a charitable donation? As per our
textbook, “…people make personal sacrifices to others. They contribute time and money
to charities because they derive pleasure from doing so. Parents help pay for their
children’s education for the same reason. These self-interested, but unselfish, acts help
maximize the givers’ satisfaction as much as any personal purchase of goods or services.
Self-interested behavior is simply behavior designed to increase personal satisfaction,
however it may be derived.” (McConnell et. all, 2012). This gives us a different way of
thinking about charitable contribution: satisfaction is derived from the act, so it may be
thought of in the same way as spending resources performing a leisurely activity, such as
skiing. If the giver’s satisfaction with life has increased, they are still acting in their own
self-interest.
4 A.

Automobiles v Forklifts
35

30

25

20
Forklifts

15

10

0
0 1 2 3 4 5 6 7 8 9
Automobiles

This production possibilities curve is based on the specific assumption of the law of
increasing opportunity costs. That means that the opportunity cost is greater the more
automobiles are produced. We can see this by looking at the difference between points A
and B vs points D and E. By producing the first two automobiles, the opportunity cost is
only 3 forklifts. Producing the last two automobiles, from 6 to 8, would cost the
production 12 forklifts. Therefore, it is much more efficient to produce only a few units
of automobiles if both must be produced.
B. If the economy is at point C, the opportunity cost of one more automobile is 4.5
forklifts. The cost of a forklift is 1/3 of an automobile. The curve’s “bowed” shape
reflects the law of increasing opportunity costs: the slope of the line will determine the
opportunity cost at a given point, and the changes in the slope reflect the change in
opportunity cost from one point to another.
C. If the economy demonstrated by this curve were producing 3 automobiles and 20
forklifts, we could conclude that the resources of this economy are not being fully
utilized. Since that is one less automobile and one less forklift than point C, the point lies
 on the inside of the curve rather than on the edge. This demonstrates the lack of
utilization of resources because the curve represents best possible productive capacity;
any point inside the curve is inefficient.
5 This example demonstrates a “sunk cost”, a “cost that has already been incurred and
cannot be recovered.” (Kenton, 2018). The meal has a set price, regardless of how much
food is consumed. Since none of the money spent on this meal will be able to be
recovered, the consumer feels as though they must eat the full meal to get the most value
out of the money that they spent. However, once they are full, any food that they
consume past that point will provide negative returns. There is decreasing utility that is
obtained with every additional unit of food consumed. Since the point of being “full”
demonstrates the maximum possible utility that can be gained from the meal, additional
consumption will be inefficient from an economic standpoint.
6 Two websites that helped me understand this material were
www.groundtruthtrekking.org, and https://www.investopedia.com. I was able to acquire
good definitions for “true cost” and “sunk cost”, respectively. By reading the information
presented on these sites, I was able to more fully understand the economic concepts
therein.
Works Cited

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, Problems,
and Policies (18th ed.). Boston: McGraw-Hill Irwin.

Coil, D. “True Cost” (2012). Ground Truth Trekking. Accessed January 5th, 2019.
www.groundtruthtrekking.org/Issues/OtherIssues/TrueCost.html

Kenton, W. “Sunk Cost” (2018). Investopedia. Accessed January 7th, 2019.

https://www.investopedia.com/terms/s/sunkcost.asp