using a common unit of measurement. It involves the conversion of all costs and benefits to a common unit
of measurement so that they can be compared. The difference between the benefits and costs of choosing
an alternative is referred to as the net benefit of the alternative. The alternative with the highest net benefit
is the optimal choice.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Cost‐Benefit Analysis
38) Kevin has a lot of free time, and he decides to pick up a new hobby. He has two options–he can take art
classes or sign up for cooking classes. He estimates that the art classes would cost him $70 and would
provide him with a benefit of $100. In contrast, the cooking classes would cost him $120 but provide him
benefits worth $160. Use cost‐benefit analysis to arrive at the optimum choice for Kevin.
Answer: Kevinʹs optimal choice depends on the net benefits of both options:
Net benefit of taking art classes = $100 − $70 = $30;
Net benefit of taking cooking classes = $160 − $120 = $40.
Therefore, given the costs and benefits involved, Kevin should sign up for the cooking classes rather than
the art classes.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Cost‐Benefit Analysis
22
Copyright © 2019 Pearson Education, Ltd.
39) Which of the following statements is true of economic reasoning?
A) Economic reasoning hampers optimal decision making.
B) Economic reasoning can only be used with normative choices.
C) Economic reasoning implies that leisure time is free and costless.
D) Economic reasoning helps people make the best use of scarce resources.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Evidence‐Based Economics: Is Facebook Free?
40) If Tom spends 4 hours a day on Facebook, and the minimum wage in his country is $7 per hour.
a) What is his opportunity cost of spending time on Facebook?
b) Given that spending time on Facebook has an opportunity cost, does this analysis suggest that Tom
should work rather than spend his time on social networking?
Answer: a) Opportunity cost refers to the best alternative use of a resource. In this case, the resource is
time. So, if Tom decided to work instead of spending time on Facebook, he would earn $7 every hour.
Therefore, Tomʹs opportunity cost of spending time on Facebook is equal to $7 × 4 = $28.
b) No, economic analysis does not dictate choices. Economics would not tell Tom what to do; it would only
help him identify the trade‐offs that he is making in his decisions. Whether Tom chooses to work or spend
time on Facebook is a normative choice that Tom should make based on costs and benefits.
Difficulty: Medium