Question

Pedro lives in the dorms and works as a barista at Starbucks. He earns $15 an hour and can work as many hours as he wants. He is considering the possibility of selling coffee to this dorm mates. His mother gave him an espresso machine when he left home for college. He can brew 30 cups of coffee an hour. He would buy the coffee grounds from a local retailer. The cost of the grounds for a cup of coffee would average $0.10 per cup. What is the opportunity cost for Pedro to sell a cup of coffee to one of this dorm mates?

Albert has $15 to spend each week on coffee and donuts.The price of a cup of coffee is $2, and the price of a donut is $1. If Albert bought 6 cups of coffee and 3 donuts in a week, the marginal utility of coffee would be 120, and the marginal utility of donuts would be 60. To maximize his utility, how should Albert modify his consumption? (a) Buy more cups of coffee and fewer donuts (b) Buy fewer cups of coffee and more donuts (c) Don’t change anything. He is already maximizing utility. (d) Buy more of both goods. (e) Buy less of both goods.

Answer 1

Question 1) The opportunity cost of doing a work is the best alternative work forgone. The opportunity cost of selling coffee is the $15 an hour earning that he could have earned.

Now, it is given that Pedro can brew 30 cups of coffee in an hour and the opportunity cost of this is $15, which he could have earned by working. So the opportunity cost of each cup of coffee is 15/30 = $0.5.

It is to be noted that the cost of grounds for a cup of coffee of $0.10 will not be considered as an opportunity cost.

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