Q1 Give four examples of opportunity cost that you are facing. Explain why are t
ID: 1107211 • Letter: Q
Question
Q1
Give four examples of opportunity cost that you are facing. Explain why are they considered costs?
Q2
Give four examples of incentive that you are facing. Explain why are these incentives?
Q3
Choose a product or a service that is elastic or inelastic and ask 10 students about their consumption behavior if the price change. The following questions should be answered in your write up,
1. How much is their current consumption of the product or service at the current prices? (e.g. coffee, meals, chocolate, cigarettes, gasoline for their cars, chewing gum, bottled water, internet service on mobile phones, telco service provider, etc.
2. At what price would they change their consumption behavior? (i.e. double, triple).
3. If the prices reached that level where they will change their consumption behavior, how would they do it? (i.e. move to cheaper substitute)
4. How does their behavior change in the short run versus long run?
5. If the Value Added Tax proposed is implemented, how would they change their consumption given the current prices? (i.e. reduce, increase, remain the same, move to cheaper product)
Explanation / Answer
1.
Opportunity cost: This is the cost arising out of sacrificing an alternative scope of action.
Examples:
Salary: A jobseeker has to choose a job out of two jobs. If a job is selected and the other is sacrificed, then the salary of the sacrificed job would be the opportunity cost of the selected job.
Interest income: An investor invests in a project on the hope of getting higher profit, instead of investing in bank’s fixed deposit. The interest earnings on fixed deposit would be the opportunity cost of the project, since the interest is sacrificed.
Rent of land: If the owner of a business contributes his land as capital investment, the opportunity of rent income on land is gone. Such rent should be the opportunity cost of business, since it is implicit cost.
Wage lost: If an employee doesn’t go to office for a day, his opportunity cost would be the wage lost for that day.
Explanation:
These are all considered to be costs because of proper evaluation of undertaking act. The act which has undertaken must be a good one, if it has economic profit.
There are two types of profits --- Accounting profit and economic profit.
Accounting profit = Revenues – All explicit costs
Economic profit = Accounting profit – Opportunity costs
Therefore, in order to judge the economic profit all sorts of opportunity costs should be considered.
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