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Question
According to the definition of opportunity cost, the more alternatives that we have given up in the undertaking an action, the higher the opportunity cost. Please make a critical comment on this statement and explain your answers using examples.
Opportunity cost
The opportunity cost of any choice (the next-best alternative) is what we forgo when we make that choice.
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$30 per $50 per $40 per $20 per $45 per hour hour hour hour hour 4 1 3 5 2
Suppose you are considering whether to go to Paris with a group of classmates during your summer holidays. The round trip airfare from Hong Kong to Paris is $6,000, but you can select to pay this airfare with a frequent-flyer coupon. All other relevant costs for the vacation in Paris are $10,000. The most you would be willing to pay for the Paris vacation is $19,000. This amount is your benefit of taking the vacation in Paris. Your only alternative use for your frequent-flyer coupon is your trip to New York after summer holidays and this is a trip that you must make. The Hong Kong-New York round-trip airfare is $8,000.
Part a
What is the economic surplus of your trip to Paris if you do not use the frequent-flyer coupon for the trip? Explain your answer and show your calculation.
Economic surplus
The economic surplus from taking any action is the benefit of taking that action minus its cost. (1)
=benefit (explicit cost + implicit cost)
Benefit
=The
Explicit cost
The actual payments a firm makes to its factors of production and other suppliers.(2)
Implicit costs
The opportunity costs of the resources supplied by the firm's owners. (3)
Part a
Economic surplus (trip to Paris ,do not use the frequentflyer coupon)
=benefit (explicit cost + implicit cost)
=19000-(6000+10000)=3000
Part b
What is the economic surplus of your trip to Paris if you use the frequent-flyer coupon for the trip ? Explain your answer and show your calculation.
Part b
Economic surplus (trip to Paris ,use the frequent-flyer coupon)
The benefit for trip to Paris = 19000 The explicit cost for the trip = 0 The implicit cost for the trip = 10000 + 8000
Part c
Should you use the frequent-flyer coupon for the trip to Paris or use it for the trip to New York ?
Part c
Economic surplus (trip to Paris ,do not use the frequent-flyer coupon) =19000-(6000+10000)= 3000
V.S Economic surplus (trip to Paris , use the frequent-flyer coupon)
Conclusion
Frequent-flyer coupon should be used for the trip to New York.
Background
Albert make all his decisions based on economic rationale and his sole objective is to maximize his economic surplus. He is required to undertake a minor surgical operation and he can select to have it done in the private hospital or in the government-subsidized hospital. He is willing to pay a maximum of $65,000 for having the operation done in the private hospital and $60,000 for having the operation done in the government-subsidized hospital. The fee charged by the private hospital equals $30,000 and the fee charged by the government-subsidized hospital equals $10,000.
Explain whether Albert should undertake the operation in the private hospital or in the government-subsidized hospital.
Cost-Benefit principle
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Economic surplus : The economic surplus from taking any action is the benefit of taking that action minus its cost. Economic surplus equation = Benefit Opportunity Costs
Part (a)
What is the maximum price Albert willing to pay for having the operation done in private hospital and government-subsidized hospital?
Part (a)
Benefit of taking operation in private hospital = Maximum price of taking operation in the private hospital = $65,000
Benefit of taking operation in governmentsubsidized hospital = Maximum price of taking operation in government-subsidized hospital = $60,000
Part (a)
What is the opportunity costs taking operation in private hospital and government-subsidized hospital?
Opportunity costs of taking operation in private hospital = the fee charged by the private hospital = $30,000
Opportunity Costs of taking operation in government-subsidized hospital = the fee charged by the governmentsubsidized hospital = $10,000
Part (a)
in
Reason: Economic surplus of taking operation in government-subsidized hospital ($35,000) > Economic surplus of taking operation in private hospital ($50,000)
Additional background
Now suppose Albert has purchased a health insurance policy and paid three months ago. The increase policy entitles Albert to claim 50% of any expense incurred in a private hospital and 40% of any expense incurred in the governmentsubsidized hospital. However, the annual premium for the next year will be increased by $3,000 if he has made a claim in the current year. Albert has already decided that he will definitely continue to purchase the insurance policy for the next year.
Explain whether Albert should (i) undertake his operation in private hospital and make the claim to the insurance company (ii) undertake his operation in government-subsidized hospital and make the claim to the insurance company (iii) maintain its decision as in the answer (a) (undertake his operation in government-subsidized hospital) and not make any claim to the insurance company
(i) undertake his operation in private hospital and make the claim to the insurance company
Opportunity Costs = 50% of the fee + annual premium for the next year will be increased = $30,000 x 50% + $3,000 = $18,000
(i) Undertake his operation in private hospital and make the claim to the insurance company
Benefit = $65,000
Opportunity cost
= $18,000
(ii) undertake his operation in governmentsubsidized hospital and make the claim to the insurance company
Opportunity cost = 60% of the fee + annual premium for the next year will be increased = $10,000 x 60% + $3,000 = $9,000
(ii) Undertake his operation in governmentsubsidized hospital and make the claim to the insurance company
(iii) maintain its decision as in the answer (a) (undertake his operation in government-subsidized hospital) and not make any claim to the insurance company
Albert should undertake his operation in government-subsidized hospital and make the claim to the insurance company.
Reason: Highest economic surplus of (i) ($51,000)
Suppose all the above information is known to the manager of the private hospital. Calculate the maximum fee that he can change Albert for having Albert agreeing to undertake the operation in his hospital.
From Part (b): The highest economic surplus (undertake his operation in governmentsubsidized hospital and make the claim to the insurance company) = $51,000
Two ways
1) take operation in private hospital and do not claim for it 2) take operation in private hospital and claim for it
Maximum fee charged of (1) = $14,000 Maximum fee charged of (2) = $22,000 Maximum fee charged = $22,000
Question 2.1(A)
20 July 2010
Stock
Close($)
Vol(1,000$)
HSBC
ICBC MTRC
21 July 2010
75.80
5.79 27.25
15,894
152,647 1,941
Stock
HSBC
Close($)
70.20
Vol(1,000$)
14,015
ICBC MTRC
5.74 27.35
187,611 1,784
State whether each stock has experienced a decrease in demand, increase in demand, decrease in supply or increase in supply, assuming there were changes in either the demand or supply curves but not both.
The volume of each stock can be known as the aggregated market equilibrium quantity (EQ)
Analysis of HSBC
Stock Close($) Vol(1,000$)
74.20
75.80
14,015
15,894
The price increased from P1 to P2 while the quantity transacted increased from Q1 to Q2.
P1 P2
74.20 75.80
Q1 Q2
14,015 15,894
Increase in demand
Analysis of ICBC
Stock Close($) Vol(1,000$)
5.74
5.79
187,611
152,647
The price increased from P1 to P2 but the quantity transacted decreased from Q1 to Q2. P1
D
The supply curve shifts to the left.
P1 P2
5.74 5.79
Q1 Q2
187,611 152,647
Decrease in supply
Analysis of MTRC
Stock Close($) Vol(1,000$)
27.35
27.25
1,784
1,941
S1 The price decreased from P1 to P2 but the quantity transacted increased from Q1 to Q2. P2
D
The supply curve shifts to the right.
P1 P2
27.35 27.25
Q1 Q2
1,784 1,941
Increase in supply
Question 2.1(B)
20 July 2010
Stock ICBC
21 July 2010
Close($) 5.74
Vol(1,000$) 187,611
Explain how you conclude about the shifts of its demand and supply curves between 20 and 21 July 2010.
Stock ICBC
Close($) 5.74
Vol(1,000$) 152,647
Analysis of ICBC
Stock Close($) Vol(1,000$)
5.74
5.74
187,611
152,647
P As the price remained the same but the quantity transacted decreased from Q1 to Q2.
S2
S1
Q2
Q1
Question 2.1(C)
20 July 2010
Stock HSBC
21 July 2010
Close($) 74.20
Vol(1,000$) 14,015
Explain how you conclude about the shifts of its demand and supply curves between 20 and 21 July 2010.
Stock
Close($)
Vol(1,000$)
HSBC
75.80
14,015
Analysis of HSBC
Stock Close($) Vol(1,000$)
74.20
75.80
14,015
14,015
S2
S1
P2
P1
The demand curve shifts to the right while the supply curve shifts to the left. Q
D2
D1
but
Reference
(1) Frank, Robert H., and Bernanke, Ben S., Principles of Economics, Fourth edition, McGraw Hill, 2009, 6
(2) & (3) Frank, Robert H., and Bernanke, Ben S., Principles of Economics, Fourth edition, McGraw Hill, 2009, 204