Managerial Economics

Topics: Costs, Price, Economics Pages: 2 (420 words) Published: September 20, 2014
Chapter 3

3-1. Concert Opportunity Cost

You won a free ticket to see a Brice Springsteen concert ( assume the ticket has no resale value). U2 has a concert the same night, and this represents your next best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you would be willing to pay up to $100 to see this band. Assume that there are no additional costs of seeing either show. Based on the information presented here, what is the opportunity cost of seeing Bruce Springsteen?

When you making a decision between two alternative, you want to choose the one that returns the highest profit. The opportunity cost of one alternative as the forgone opportunity to earn profit from the other. The opportunity cost is what we give up to pursue it. If I made the decision to go to the Bruce Springsteen concert and not the U2 concert my opportunity cost would be $20 because the my next best alternative to the Bruce Springsteen concert is the U2 concert. The U2 concert has a benefit of $100 and a cost of $80 so the net benefit is $20. The net benefit is what you are giving up in order to attend the Springsteen concert. The opportunity cost of seeing the Bruce Springsteen concert is $20.

3-3. Housing Bubble

Due to the housing bubble, many houses are now selling for much less then their selling price just two or three years ago. There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What fallacy are they making?

Homeowners that have a higher asking price just because they paid more for the home are making a fixed cost fallacy or a sunk cost fallacy. This is when irrelevant costs are considered.

3-5. Starbucks

Starbucks is hoping to make use of its excess restaurant capacity in the evenings by experimenting with selling beer and wine. It speculates that the only additional costs are hiring more of the same sort of workers to cover the additional hours and...
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