Chapter 1 Question

Concept Illustration - Opportunity Cost

The concept of opportunity cost can be illustrated through the eyes of a small child. Suppose that a young girl named Amber receives a $30 gift certificate from her grandparents to be used at Toys4Me. The grandparents take the girl to the store, where she spots several toys she would likeall priced above $30. After gaining a sense of what is affordable, Amber narrows her focus to small stuffed animals ($10 each) and picture books ($5 each).

The grandparents tell Amber that she can buy three stuffed animals, six books, or some limited combinations of the two items. She initially settles on one stuffed animal at $10 and four picture books at $5 each. The grandparents assure her that this selection works; it will exactly use up the $30 certificate. Amber takes the goods to the checkout counter.

But while waiting to pay, she changes her mind. She decides she wants another stuffed animal because they are so cute. What should she do? The grandparents tell her to go pick out a second stuffed animal and then return two of her four books to the shelf. She makes the exchange, ending up with two stuffed animals at $10 each and two picture books at $5 each.

From an adult's perspective, the second stuffed animal cost $10. But in the eyes of the child, it cost two picture books. To get the second stuffed animal, Amber had to give up two books. That sacrifice was the opportunity cost of her last-minute decision. Amber's way of looking at cost is one of the fundamental ideas in economics.

1.Give an example of an opportunity cost in your life

2. Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $40 worth of product X. Each of these techniques shown in the following table will produce exactly $40 worth of X.

	Unit resource prices	Method #1	Method #2	Method #3
Land	$1	6	3	4
Labor	2	4	3	3
Capital	3	3	4	6
Entrepreneurship	4	2	4	1

Which method is most efficient? What is the profit or loss?

3. Give me an example of how you have used barter in your life