Economics Questions in Real Life Scenarios

Topics: Economics, Costs, Cost Pages: 2 (632 words) Published: December 29, 2008
Question One
a)“I paid $1500 for this economics course. Therefore, I am going to attend the lectures even if they are useless and boring.” This is not an example of sound economic thinking. The person has stated the lectures are “useless and boring”, implying that there are much more “useful” and “interesting” activities which could be foregone instead of attending the lectures. In other words, the speaker is not achieving maximum utility by attending the lectures.

In this situation, the economic decision maker would attempt to maximise net benefit and consider the concept opportunity cost. Considering they have already spent the $1500 for an activity which is “useless and boring”, the economic decision maker would consider undertaking other activities which he/she would obtain maximum utility – such as watching a movie, working at a shop or any other activity which is not “useless and boring”.

b)“Housing prices in Sydney are overvalued.”
This is an example of a normative economic statement, as it implies that housing prices should be lowered as they are currently “overvalued”. Economists attempt to be scientific, through a “positive framework” by stating “what exists” based on evidence (positive) rather than “what should exist” (normative). Hence, this statement does not demonstrate sound economic thinking.

If the statement was “Housing prices in Sydney are the highest they have ever been in history”, and was supported by relevant evidence, it would be an example of sound economic thinking as this is a positive statement.

c)“I own 1,000 shares that I cannot afford to sell until the price goes up enough for me to get back my original investment.” This is not an example of sound economic thinking. The original investment is sunk cost, and the resources spent cannot be recovered. It would be a better to sell the shares and find a alternative.

d)“The reason why profit maximizing firms often charge lower prices at higher output levels is because...
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