Principles of Economics (Opportunity cost and compensating differentials, zero economic profit)

Question 1

Rob is a Professor of Public Policy at an elite university in a small industrialised nation. His annual earnings are $180,000. Rob enjoys teaching, doing public policy research and drinking French wine.

a)Rob does a lot of consultancy work for government departments who also retain the services of large professional services firms. Tired of losing tenders to Rob, one of these firms offers him an annual salary of $750,000 to leave the university and take up a position as a senior consultant. If Rob continues working at the university, what is the opportunity cost of his decision?

b)Rob knows that if he accepts the job at the consultancy he will enjoy the research aspect of the new job just as much as he enjoys the research he does at the university. However, Rob will no longer be able to teach his favour subject, Economic Theory for Public Policy, since the firm expects Rob to dedicate all of his time to research consultancy. If Rob refuses to take the job, what can we infer about how Rob values teaching public policy students?

You may want to review pp. 447-448 of PoE.

c)As a wine lover, Rob has always liked the idea of owning and managing his own vineyard and believes he will enjoy this just as much as his job at the university. Having worked at the university for a number of years he's saved enough money to be able to buy one. How much annualfinancialprofit does Rob need to earn in order to make zeroeconomicprofit? Would your answer change if Rob had never received the job offer from the consultancy? Why or why not?

Assume the only return that Rob makes from the winery is the profit. The business does not pay him a wage on top of the profit.