Skill: Level 3: Using models
Section: Checkpoint 1.2
Status: Old
AACSB: Written and oral communication
5) Shaniq can spend the next hour studying for a finance test, hiking along the Oregon coast, watching reruns of Lost on television, or napping. If she decides to study, what is the opportunity cost of her choice: hiking, watching television, or napping?
Answer: With the information given, it is impossible to determine the opportunity cost. The opportunity cost is the highest-valued alternative forgone and the problem does not give Shaniq's ranking of the options. For instance, if Shaniq thinks that if she had not studied she would have watched Lost, then watching Lost is the opportunity cost. However, if Shaniq thinks that if she were not studying, she would be strolling along the beach, then the beach walk is the opportunity cost.
Topic: Opportunity cost
Skill: Level 3: Using models
Section: Checkpoint 1.2
Status: Old
AACSB: Written and oral communication
6) For spring break, Melanie will either stay home or go to Daytona Beach. At home, Melanie pays $10 per day for food and earns $90 a day at her job. At Daytona Beach, Melanie will stay with friends and so has no lodging cost. She will pay $20 per day for food. In terms of dollars, Melanie's opportunity cost per day of going to Daytona Beach is how much?
Answer: Melanie's opportunity cost of going to Daytona Beach is $100 per day. If she goes, she spends $10 extra for food and loses $90 income from her job, for a total opportunity cost of $100.
Topic: Opportunity cost
Skill: Level 3: Using models
Section: Checkpoint 1.2
Status: Old
AACSB: Reflective thinking
7) Why is the benefit of something measured by what you are willing to give up?
Answer: The benefit of a good or service, say a slice of pizza, is the pleasure it brings the consumer. But it is impossible to measure someone's pleasure. In order to measure the benefit of the slice of pizza, we need something that we can measure. Thus, to measure the benefit of the slice of pizza, we ask the consumer what he or she is willing to give up to get the slice of pizza. So, if the consumer was willing to give up, say, three hot dogs to get the slice of pizza, we can determine that the benefit of the slice of pizza to the consumer is three hot dogs.
Topic: Benefit
Skill: Level 2: Using definitions
Section: Checkpoint 1.2
Status: Old
AACSB: Written and oral communication
8) Define marginal cost and marginal benefit.
Answer: Marginal cost is the opportunity cost of a one-unit increase in an activity. Marginal benefit is the benefit of a one-unit increase in an activity.
Topic: Marginal benefit, marginal cost
Skill: Level 1: Definition
Section: Checkpoint 1.2
Status: Old
AACSB: Reflective thinking
9) In New State, the bottling law requires that people get a refund of five cents when they return an empty bottle or can. Why does the state pay people to return bottles? In your answer, be sure to mention the role played by rational choice.
Answer: Policy makers know that people making rational choices respond to incentives. Instead of throwing away bottles and cans, people will now bring the used bottles and cans to the designated areas for recycling in order to receive their payment. Thus policy makers have taken advantage of people's rational decision making in order to reduce litter and clean the environment.
Topic: Incentives
Skill: Level 3: Using models
Section: Checkpoint 1.2
Status: Old
AACSB: Written and oral communication
10) Must a rational choice always work out well? In other words, is it possible for someone to regret a rational decision?
Answer: It is not necessarily the case that a rational choice always works out well; sometimes people will come to regret a rational decision. Decisions are made based on the information at hand. Sometimes that information is incomplete. For instance, when faced with a math midterm on Thursday, on Wednesday night a student might believe that he or she has a strong grasp of the subject and hence rationally decide to go to a movie rather than study. When the test reveals that the student actually understood little about the math and the student earns a low score, he or she likely regrets not studying. But the regret does not imply that the decision to see the movie was irrational.
Topic: Making rational choices
Skill: Level 2: Using definitions
Section: Checkpoint 1.2
Status: Old
AACSB: Written and oral communication
11) Discuss what is necessary to make rational decisions. Be sure to mention opportunity cost, marginal cost, and marginal benefit.