Topics: Investment, Economics, Risk Pages: 2 (1010 words) Published: April 22, 2015
Microeconomics: Week 1 Review Questions

1) Suppose that the wages of young high school graduates fell. In what sense has the true “cost” of a college education been changed by this development.

Other things equal, if wages of young high school graduates decline, the potential alternative use of time spent studying in higher education…namely, working with only a high school education…has relatively less value. Therefore, the opportunity cost of student study time measured in foregone wages is lower. Assuming no change in the explicit costs of higher education (tuition, fees& books), the opportunity cost decline has reduced the overall cost of higher education.

2)Suppose that a real estate developer buys a parcel of land for 3 million dollars. He intends to build 40 houses on this lot . The townspeople wish to preserve the land as open space and offer the developer 3.75 million for the land. Explain how the developer would use the concept of opportunity cost when deciding whether to accept the town’s offer .

There are several alternative ways of conceptualizing the developer's choice from an opportunity cost standpoint. For example, by accepting the town's offer of 3.75 million up front the builder forfeits the opportunity to build and sell 40 houses. How much is this opportunity worth? That depends on the expected revenues from selling the homes after subtracting the construction and selling expenses associated with building the homes. Assuming that the homes on average would not be expected to sell until 1 year in the future, these expected net sales revenues should be compared not to 3.75 million, but to 3.75 million + the expected interest or profits that could be earned in 1 year if the 3.75 million were invested in assets with risk levels similar to the risk of continuing to develop this parcel of land.

3)Suppose a bank advertises a “free” checking account but requires that a $2000 minimum average daily balance be maintained...
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