18 Questions
What is opportunity cost?
The value of the next best alternative forgone
Explain the difference between explicit and implicit costs.
Explicit costs require a money payment, while implicit costs do not require a money payment.
How does opportunity cost help explain the decisions of star athletes regarding college?
The opportunity cost for star athletes includes the potential earnings they could make as professionals instead of attending college.
Why do economists use opportunity costs to understand the behavior of firms and individuals?
Economists use opportunity costs to analyze decisions made by firms and individuals in order to maximize profit.
Give an example of an explicit cost related to attending college.
Tuition fees
What is an implicit cost in the context of attending college?
The amount of money a student could have earned if they had worked instead of attending school.
Define scarcity.
Scarcity means that resources are limited and there are not enough resources available to satisfy everyone's wants.
Explain the concept of opportunity cost.
Opportunity cost is what you must give up when you make a choice, or the value of the next best alternative foregone.
What does Milton Friedman mean by 'there is no such thing as a free lunch'?
Milton Friedman means that in a world of scarcity, everything has an opportunity cost, implying that nothing is truly free.
How does scarcity relate to the concept of opportunity cost?
Scarcity necessitates choices due to limited resources, leading to opportunity cost as individuals must give up one option to pursue another.
Differentiate between accounting profits and economic profits.
Accounting profits consider explicit costs, while economic profits also account for implicit costs, such as opportunity costs.
Explain why accounting profits and economic profits are not the same.
Accounting profits focus on explicit costs like wages and rent, while economic profits include implicit costs like opportunity costs, making them different measures of profit.
What is the main difference between opportunity costs and explicit costs?
Opportunity costs also include implicit costs, making them higher than explicit costs.
Why do accountants not include implicit costs in their calculations?
Implicit costs are difficult to measure.
How does the concept of opportunity costs impact decision-making for firms and individuals?
They use opportunity costs to make key decisions.
Using the example of Farmer Jones, explain why his economic profit is lower than his accounting profit when planting wheat.
The economic profit is lower due to the inclusion of implicit costs, such as the opportunity cost of giving up teaching banjo lessons.
How does hiring a laborer to plant wheat impact Farmer Jones's economic profit?
His economic profit would increase despite the rise in explicit costs.
What is the significance of understanding opportunity costs in economic decision-making?
Understanding opportunity costs helps in evaluating the true cost of choices and making informed decisions.
Explore the concept of opportunity cost in economics and understand its significance in decision-making processes. Learn how to evaluate the cost of pursuing different options, including calculating explicit costs and the value of forgone opportunities.
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
