The Scope of Economic Analysis

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Question 1.1
“According to the definition of opportunity cost, the more alternatives that we have given up in undertaking an action, the higher the opportunity cost.” Please comment on this statement and explain your answers using examples.

Ans
Opportunity cost of an action refers to the value of the best alternative that must be given up in order to undertake that action. That is, the highest-valued option forgone.

The statement in the question is uncertain and is determined by situation, because the opportunity cost is the value of the best alternative forgone rather than the sum of all the alternatives forgone. There are two possibilities. Firstly, if the value of one added option is higher than that of original best alternative forgone, the opportunity cost increase. By contrast, if each of the added options’ values is no more than that of original best alternative forgone, the opportunity cost remains constant.

Example for the situation that the value of one added option is higher than that of original best alternative forgone:

Suppose that you have $5,000 dollars at hand and you are considering spending this money on (Listed in the priority of the action’s value for you)

Original buying listValueAdded alternativesvalue
1. Buy a notebook101. Buy a mobile phone9
2. Buy a professional camera82. Buy a video game console5 3. Buy a handbag6
4. Trip to Taiwan4
In this case, originally your opportunity cost, best alternative forgone, of buying a notebook (valued highest as 10) is to buy a professional camera (valued 8). However, the option of buying a mobile phone (valued 9) come up, whose value exceeds buying a professional camera. Now, the best alternative forgone will be considered as buying a mobile phone. Consequently, your opportunity cost of buying a notebook now is to buy a mobile phone. In a word, the opportunity cost rises from 8 to 9, when we introduce in alternative of buying a mobile phone in this situation....
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