Question

The following are things you could be doing Watch some videos on your phone, providing a...

The following are things you could be doing

  • Watch some videos on your phone, providing a benefit of $5
  • Skimming a book, giving you a benefit of $10.
  • Bike to the Walgreens, buying some food. The Walgreens has only two items of food that you like to eat, salted cashews, and unsalted cashews (boxes of which cost $3 each) and Hershey’s (that cost $1 each). Each box of cashews provides $7 of utility/happiness, while each Hershey’s gives $2. You can spend up to $10, as that is all the change you have

Considering the three activities are mutually exclusive (videos, skimming a book, Walgreens)….

1. What is the opportunity cost (in dollars) of going to the Walgreens?

2. Suppose you were to go to the Walgreens. Once you were there, what would be the opportunity cost (in dollars) of buying a single box of cashews?

3. What is the opportunity cost (in dollars) of watching videos?

Homework Answers

Answer #1

Opportunity cost is the cost of the next best alternative that is not availed due to exercising one particular task or activity.

Answer 1: The opportunity cost of going to Wallgreens in dollars is the benefits dervied from the next best alternative, i.e. skimming a book that has a benefit of $10.

hence, the required opportunity cost is $10.

Answer 2: When I go to Wallgreens, I have two options: either to buy cashews that derives a utility of $7 or hersheys that provides a utility of $2. Hence, in this case, the opportunity cost of buying a packet os cashews is the utility derived from buying hersheys, i.e. $2.

Answer 3:

Utility that can derived by spending $10 at Wallgreens: Utility from cashews + utility from hersheys = 21+1= $22.

Calculations:

cost of a box of cashews = $3 and utility derived is $ 7. So, we purchase 3 boxes of cashews by spending $9 and deriving a total utility of $21.

Also, we will purchase maximum that quantity of hersheys so that the utility derived from its purchase is equal to the cost of hersheys. In this case, cost of hersheys is $1 and utility derived is $2. Hence, we can purchase a maximum of 2 packets of hersheys. But, we have only $1 available from the balance that we have. So we purchase one box of hersheys.
Total utility from hersheys= $1.

Hence, the opportunity cost of watching videos is the utility and benefits derived from the next best alternative foregone, i.e. going to Wallgreens, i.e. $22.

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