PRINCIPLE OF MICROECONOMICS

Principle of Microeconomics

Principle of Microeconomics

Answer 1

(a) Opportunity Cost

The cost of passing up the next best choice, when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement (Barr, 2004).

So, In terms of Chevrolets the opportunity cost of producing Toyotas in each country is as follows:

United States: $ 2,000

Japan: 500,000 yen

Comparative Advantage

In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced.

Japan has the comparative advantage of producing Chevrolets, because the opportunity cost for Toyotas is double than that of Chevrolets. Due to this higher cost, it is better for Japan to produce Chevrolets instead of Toyotas.

Based on comparative advantage, Japan should produce Chevrolets, as it is feasible for Japan to produce Chevrolets and let United States produce Toyotas as the opportunity cost of Toyotas in United States is not higher as compared to Japan.

Answer 2

As stated in the question that the attributes of both the jobs are same, so I will advice for the job on the basis of distance, which is nearer to his home i.e. West Coast.

Let's suppose my friend resides in San Francisco in the west coast. I will suggest him a job, which has the least distance from San Francisco. The distance of Boston from San Francisco is about 3,119 Kms and the distance of Columbia S.C. from San Francisco is 2,716 Kms. Therefore, I will advice my friend to accept the offer for the job located in Columbia S.C. so that the airfares and the cost of travelling could be saved.

If the companies are also offering airfares or travelling costs, I would even then suggest him to join a company which is nearer to his home, because of the time constraint in the travelling.

We can also take this case as an opportunity cost scenario, as in this case, the time consumed in travelling will be the opportunity cost for my friend. Opportunity cost does not only refer to some kind of monetary cost involvement but other factors can also be considered in the opportunity cost like time, involvement, relationships etc.

Answer 3

As an economist, this is quite surprising because we know that when supply is short, demand increases and hence increasing the prices. But in the given scenario, the prices and the demand fall, when the supply decreases, this is in contradiction with the law of supply and demand. The explanation of this is the uncertainty effect. The people get afraid of the terrorist attacks and don't want to locate their offices in ...