Explain why opportunity cost is the best forgone alternative and provide examples

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STUDENT NAME ID NUMBER DATE

AssignmentCover Sheet

COURSE NAME ECON 501

COURSE NUMBER Managerial Economics

INSTRUCTOR NAME Dr.MuhammadJumaaASSIGNMENT NAME Assignment ,Term 4

Explain why opportunity cost is the best forgone alternative and provide examples of some opportunity costs that you have faced today.

The term opportunity cost is the value of next best alternative available. This is the most preferred and desirable alternative number two to the chosen good or service. For instance, suppose one takes time traveling, one cannot spend the same time visiting friends, or doing another thing. Suppose the best alternative to traveling is visiting friends, then the opportunity cost in visiting friends is the time and money spent and other things the person would have enjoyed or obtained in visiting friends.

Explain what it means to choose at the margin and illustrate with three choices at the margin that you have made today.

The word margin means the additional resource. Among the examples include choosing whether eating one unit of chocolate.

Examples of choose of the margin

Eating extra unit of chocolate

Traveling or practicing one more hour

Watching TV for extra hour.

Apple Computer Inc. decides to make iTunes freely available in unlimited quantities.

How does Apple’s decision change the opportunity cost of a download?

The opportunity cost is lowered for iTunes. Opportunity cost is the cost forgone in choosing a good in alternative to another. When Apple avails free iTunes, customers will tend to go for them and download them free than buy the same tunes elsewhere. This means that more people will go for iTunes than alternatives.

Does Apple’s decision change the incentive that people face?

Availing free download will increase the incentives people have for iTunes. The free will encourages people to download them.

c.Is Apple’s decision an example of a microeconomic or a macroeconomic issue?

Apple’s decision is microeconomic issues. This is because it affects only individuals who have taste for iTunes. It does into affect the entire music industry.

Why does the PPFbow outward and what does that imply about the relationship between opportunity cost and the quantity produced?

Production possibility frontier (PPT) is the boundary that exists between combinations of services or goods that are purchasable and those that are not purchasable. To explain PPT further, we analyze two different goods taking quantities of other goods constant. This means all other factors are kept constant (ceteris paribus) with exception of the goods or services under consideration.

The following figure shows PPT of cola and pizza.

Any point on the curve for instance D and any point inside the curve for example Z can be achieved. Any point outside the curve cannot be achieved.

Use the following information to answer questions 5 to 7.

Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose that Brazil’s production possibilities for ethanol and food crops are as in the table.

Ethanol(barrels per day) Food crops(tons per day)

70 and 0

64 and 1

54 and 2

40 and 3

22 and 4

0 and 5

Draw a graph of Brazil’s PPFand explain how your graph illustrates scarcity.

From the graph the sections inside the line is achievable while points outside the graph are not achievable.

If Brazil produces 40 barrels of ethanol a day, how much food must it produce to achieve production efficiency?

Suppose it achieves 40barrels per day, three tons must be produced per day.

c.Why does Brazil face a tradeoff on its PPF?

Tradeoff is a condition which entails loosing a good to again another good. Normally, when one product decreases, the other increases.

6.a. If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol?

Suppose Brazil increases from 40 barrels to 54 barrels, the opportunity cost would be 54-40 coming to 14 barrels lost or forgone.

If Brazil increases its production of food crops from 2 tons per day to 3 tons per day, what is the opportunity cost of the additional food?

Suppose Brazil increases its production of food crops from 2 tones to 3 tons daily, the opportunity cost would be 1 ton per day.

What is the relationship between your answers to parts (a) and (b)?

The opportunity forgone is the difference between the obtained ad the lost.

7. Does Brazil face an increasing opportunity cost of ethanol? What feature of Brazil’s PPF illustrates increasing opportunity cost?

Brazil faces a decreasing opportunity cost of ethanol. Ethanol reduces as demand for barrels increase and vice versa.