Which of the core principles (1) Scarcity, Choice and Opportunity Cost, 2) Cost-benefit, 3) Incentive principle, 4) Diminishing returns) is represented by the statements below? Provide a justification for your choice. (a) "There is no such thing as a free lunch" (b) Suppose the state of Illinois passes a law that bans smoking in restaurants. As a result, residents of Wisconsin who do not like breathing second-hand smoke begin driving across the border to Illinois to eat at restaurants there. (c) A cafe may wish to serve more customers during the busy summer months. However, employing extra workers may be difficult because of a lack of space in the cafe.
Question 1
Which of the core principles (1) Scarcity, Choice and
(a) "There is no such thing as a free lunch"
(b) Suppose the state of Illinois passes a law that bans smoking in restaurants. As a result, residents of Wisconsin who do not like breathing second-hand smoke begin driving across the border to Illinois to eat at restaurants there.
(c) A cafe may wish to serve more customers during the busy summer months. However, employing extra workers may be difficult because of a lack of space in the cafe.
Question 2
(a) Catherine buys and sells real estate. Two weeks ago, she paid $300,000 for a house on Pine Street, intending to spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Catherine purchased. As a result of the city’s announced plan, Catherine is weighing two alternatives: She can go ahead with the $50,000 in repairs and then sell the house for $290,000, or she can forgo the repairs and sell the house as it is for $250,000. What should Catherine do?
(b) Consider your decision whether to go skiing for the weekend. Suppose transportation, lift tickets and accommodation for the weekend costs $300. Suppose also that restaurant food for the weekend will cost $75. Finally, suppose you have a weekend job that you will have to miss to go skiing, which pays you $120. Calculate the opportunity cost of going skiing? Do you need any other information about computing the opportunity cost?
Question 3
Consider a corn farmer with one acre of land. In addition to land, other factors include quantity of seeds, fertilizer, water, and labor. Assume the farmer has already decided how much seed, water, and labor he will be using this season. He is still deciding on how much fertilizer to use.
|
Units of Fertilizer |
Total Ears of Corn |
Marginal ears of Corn |
|
1 |
100 |
|
|
2 |
250 |
|
|
3 |
425 |
|
|
4 |
550 |
|
|
5 |
600 |
|
|
6 |
525 |
(a) Determine the marginal ears of corn and complete the table.
(b) At what point do diminishing returns set in for the farmer? Justify your response
Hi, according to our guidelines we are allowed to answer only one question with upto three sub-divisions in a single session. So I can provide answers for question number 1. If you would like to get answers for the remaining questions, please post it in separate sessions.
Theory of scarcity, choice and opportunity cost states that every economic decision involves using up scarce resources and therefore for every choice there is an opportunity cost which is the cost of forgoing an alternative choice.
Principles of cost benefit analysis studies marginal cost and marginal benefit before initiating any economic decision.
According to incentive principle people typically respond to incentives and more like to buy products and services with higher benefits.
Law of diminishing returns states that if more units of a variable input are used with a fixed amount of other inputs, after a point, a smaller and smaller return will accrue to each additional unit of the variable input.
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