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Use the cost-benifit model to discuss how incentives and opportunity costs affect the decision-making of individuals....

Use the cost-benifit model to discuss how incentives and opportunity costs affect the decision-making of individuals. You should use your own examples to explain.

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Answer #1

While opportunity costs can be treated as costs incurred, incentives are analogous to benefits.
Opportunity cost is the cost incurred for other alternatives when one alternative is chosen. Incentives are what encourages an individual to take a decision.
e.g. :
1) Suppose, Jack wants to buy an ice-cream from the ice cream vendor. His favorite flavor is chocolate, while it costs $10 and a vanilla flavored ice-cream costs $5. He has only $10 to spend for 2 days . Now, if he wants to eat ice cream again the next day, he will need to decide what to buy.

Costs(Opportunity costs) Benefits(Incentives)
  • Missing out on eating his favorite chocolate flavored ice cream (Buys a vanilla ice -cream )
  • Does not get to eat ice cream the next day(Buys a chocolate ice-cream)
  • Gets to eat ice-cream for one more day(Saves $5)
  • Gets to eat his favorite flavored ice-cream(Personal satisfaction)
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