Explain why opportunity cost is the best forgone alternative and provide examples of some opportunity costs that you have faced today
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When a decision to undertake one activity is made, often many alternative activities are no longer possible. Often these activities are mutually exclusive so only the highest valued alternative is actually forgone. For instance, the decision to go to a student's 8:30 AM class eliminates the possibility of sleeping in during the hour and of jogging during the hour. But in this case, it is impossible to both sleep in and to jog during the hour, so the opportunity cost cannot be both activities. What is lost is only the activity that otherwise would have been chosen—either sleeping in or jogging—which is whatever activity would have been chosen, that is, the most highly valued of the forgone alternatives. For students, attending class, doing homework, studying for a test are all activities with opportunity costs.
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Suppose Jason owns a small pastry shop. Jason wants to maximize his profit, and thinking back to the microeconomics class he took in college, he decides he needs to produce a quantity of pastries which will minimize his average total cost. Will Jason's
strategy necessarily maximize profits for his pastry shop? A) Yes; Since Jason's pastry shop is in a perfectly competitive market, the only way to maximize profit is to produce the quantity where average total cost is minimized. B) Not necessarily; This strategy will only maximize Jason's profit in the long run, but not in the short run. C) No; In order to maximize profit, Jason would never want to produce the quantity where average total cost is minimized. D) Not necessarily; Depending on demand, Jason may maximize profit by producing a quantity other than that where average total cost is at a minimum.
Describe the relationship between the size of the MPC and the multiplier. How does it compare to the relationship between the size of the MPS and the multiplier?
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