Question

The money price of a Persian rug is \(\$ 100\) and the money price of an Egyptian kaftan is \(\$ 25\) a. What is the opportunity cost of a Persian rug in terms of an Egyptian kaftan? b. What is the relative price of an Egyptian kaf\(\tan\) in terms of Persian rugs?

Short answer

a. The opportunity cost of a Persian rug is 4 Egyptian kaftans. b. The relative price of an Egyptian kaftan is 0.25 Persian rugs.

Step-by-step solution

– Find the Opportunity Cost

The opportunity cost of an item in terms of another item is found by dividing the price of the first item by the price of the second item. Here, the opportunity cost of a Persian rug in terms of an Egyptian kaftan is calculated as follows: Opportunity Cost of Persian Rug = Price of Persian Rug / Price of Egyptian Kaftan Substitute the given prices: Opportunity Cost of Persian Rug = \( \$100 / \$25 \) = 4 Therefore, the opportunity cost of one Persian rug is 4 Egyptian kaftans.

– Find the Relative Price

The relative price of an item in terms of another item is also found similarly by dividing the price of the second item by the price of the first item. Here, the relative price of an Egyptian kaftan in terms of Persian rugs is calculated as follows: Relative Price of Egyptian Kaftan = Price of Egyptian Kaftan / Price of Persian Rug Substitute the given prices: Relative Price of Egyptian Kaftan = \( \$25 / \$100 \) = 0.25 Therefore, the relative price of one Egyptian kaftan is 0.25 Persian rugs.

Key concepts

opportunity cost

Opportunity cost is a key concept in economics. It represents the value of the next best alternative foregone when making a decision. In other words, it's what you give up to get something else. When we calculate the opportunity cost of a Persian rug in terms of an Egyptian kaftan, we are looking at how many kaftans we must sacrifice to obtain one rug.