Question

In each of the following situations, identify the relevant economic principle and explain how it applies.

a) Larissa has lived in her own house for many years. However, rents have recently increased so much that Larissa considers moving into a smaller house and renting out her own.

b) Tashonna is a talented singer and she strongly wants to pursue an artist’s career. However, she is two years short of graduating from law school. She is certain she will never be a lawyer because she does not like it and has no gift to be a lawyer. However, her family insists she finish her studies, since she has already spent so much time and money on law studies. What should she do?

c) There are a few industrial sites in town, producing essential goods and services for the residents and providing the citizens with vital jobs. However, the businesses, including an airport in the very downtown, also produce pollution, congestion, and noise. People understand the blessings of economic and civil freedoms and are pleased and proud to have productive activities in their town. They started, though, to crave for a more pleasant place to live in. What economic principle can give these people some guidance about what to do?

Answer 1

(a) The economic term is opportunity cost. As Larissa is living in her own house, the opportunity cost is the rent that she could earn by instead renting her place. As the ren increases, the opportunity cost increases and it makes it more likely that she will rent out her house.

(b) The economic term is sun cost. these are costs that are already incurred and which should not affect any decision making. The time and money spent on law is the sunk cost. It should not affect the career decision for Tashonna and if she believes that law is not a place for her, she should switch to music irrespective of the sunk costs.

(c) The economic principle is a negative externality. This is is the negative impact of a decision or outcome of one party over a third party. Here, pollution, congestion and noise are creative negative impacts for the people and the businesses should pay to keep them down.