Question

Use the ideas of opportunity cost, marginal analysis, and sunk cost to give advice to the following people:

a. When Ursula goes to an all-you-can-eat buffet, she eats so much that she is sick for two days. But she says it’s OK, because it didn’t cost her anything extra. Your advice?

b. Victor is thinking about starting a small business selling baseball caps in the shopping mall. He tells you that if he makes a financial investment of $10,000 and works full-time for a year, he can earn $20,000 per year. Since the gain of $20,000 exceeds the $10,000 he invests, this seems like a good idea to him. Your advice?

Answer 1

a. Ursula should realize that the payment that eating more than the efficient level could lead to negative utility, and thus could cause her discomfort in future. Besides, the bill that she had paid for buffet is a sunk cost, which cannot be recovered. However, being sick is the opportunity cost for her for not performing her day to day tasks efficiently.

b. This might be a good idea to him, given his revenue of $20,000 exceeds both his financial investment, as well as other sources of income that he would have earned like interest rates from bank had he invested this money of his in the bank, or had used up his time in other activities(like his office job etc.) that would have paid him certain remmuneration.