Opportunity Cost

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1.a)Because of the issue of scarcity, people must make choices, what determines these choices is the value we place on them and what we have to give up to get them. What we have to give up is called opportunity cost (OC). For example, if I decide to go hiking instead of attending my tutorial class, “attending the class” would be my opportunity cost, and “hiking” what I have evaluated more important in term of benefits and costs. In this instance, the opportunity cost of making a pizza for Monica is 6 coffee: which is the quantity of coffee Monica has to give up to make a pizza, for Rachael the opportunity cost is 4 coffee. To determine absolute and comparative advantages we compare the opportunity costs. Given that Monica and Rachael are using …show more content…

It is possible to be more productive if specialised in something and then cooperate and trade.The higher is the opportunity cost the smaller they pay-off. While Monica has to give up to 6 coffees making a pizza in a hour, Rachel has the lower opportunity cost of 4 coffees. However, in this instance Monica is able to make 2 pizzas in one hour and Rachel to make 4 coffees in the same amount of time. If Rachel specialises in making pizza and Monica in making coffee they would both end up with ½ of a pizza and 6 coffees each. The best choice to get both benefit in the trade would appear to be for Monica to specialise in making pizza while for Rachael to specialise in making coffee so they will be able to get 1 pizza each and 2 coffees …show more content…

We can consider those values as prices of the good. Monica would not receive any benefit paying more than 6 coffee as she can make 1 pizza in 30 minutes and in the same time 6 coffee. Rachael would not pay more than 4 coffee as she can make 1 pizza in 1 hour and in the same time 4 coffees. Therefore, the highest price would be 6 coffee and the lowest price would be 4 coffees.

2)The marginal benefit is the additional benefit caused by each new unit of a good and it does depend on how people make the decision to pay to consume that additional unit, the additional satisfaction they gain. It may varies because of the quantity and in general decreases as consumption increases. However, in the case of water, I can decide to reduce the consumption and for example use water less for activities like having showers or watering the plant in such as that situation the marginal benefit will be smaller but, if I live in a desert area, the marginal benefit will be larger because of its

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