Question

Use the ideas of opportunity cost, marginal analysis, and sunk cost to give advice to these people: a. Raymond always goes to his office to work for 3 hours on Sunday afternoon, although his job doesn’t require him to do so and he doesn’t get paid extra, because his company serves a free lunch to anyone who shows up on Sunday. What is your advice about the true cost of Raymond’s lunch?

b. You are graduating from college and you want to sell your computer. You have paid $750 to install additional software in the last year. You could sell your computer for $3000. However, if you upgraded the amount of computer memory you could sell it for $3500. It can be upgraded for $350. Should you sell your computer as is, or should you upgrade the hard memory?

c. Wanda is at a vacation resort where a day-long sailing trip is included in the price she has paid for the room. Sailing makes Wanda sick, but she figures that since she has paid for the trip, she ought to take it. Your advice?

d. A state government decides that it needs to improve transportation, so it passes a law that requires all other spending to be frozen at current levels, and all increases in state spending to be devoted to building roads and improving mass transit for the next five years. Your comment?

Answer 1

The true cost is opportunity cost. He could have earned something for this period in best alternative possible. So he is not simply gaining. We have to factor opportunity cost

B here the marginal cost is 350 and marginal benefit is 500.since benefit>cost it should be upgraded first

C The price she has paid is sunk cost. It should not influence current decision

D The fall in spending is opportunity cost. This is too much as spending on all other things is frozen