Question

Suppose that you are given a \(\$ 100\) budget at work that can be spent only on two items: staplers and pens. If staplers cost \(\$ 10\) each and pens cost \(\$ 2.50\) each, then the opportunity cost of purchasing one stapler is: a. 10 pens. b. 5 pens. c. zero pens. d. 4 pens.

Short answer

The opportunity cost of purchasing one stapler is 4 pens (option d).

Step-by-step solution

Define Opportunity Cost

Opportunity cost refers to the value of the next best alternative given up when making a choice. In this context, it is the amount of pens you forgo by purchasing one more stapler.

Calculate Cost Difference

Determine how much more money is spent when purchasing a stapler instead of pens. Each stapler costs $10.

Determine Price of a Single Stapler

Each stapler costs $10.

Determine the Equivalent Number of Pens

Calculate how many pens can be bought for the price of one stapler. Since each pen costs \(2.50, the number of pens given up when buying a stapler is calculated by dividing the cost of one stapler by the cost of one pen. \[ \text{Number of pens} = \frac{\\) 10}{\$ 2.50} = 4 \]

Identify the Opportunity Cost

The opportunity cost of purchasing one stapler is 4 pens, which means option d. 4 pens is correct.

Key concepts

Budget Constraint

A budget constraint is a simple tool that shows the trade-offs between different goods we can purchase given our limited resources, like money. For consumers, understanding this constraint helps in making informed decisions about what to buy. When your wallet gives you just $100, and you eye those fancy $10 staplers and $2.50 pens, your budget constraint sets the limits. You have to stay within what you can afford.
Think about a seesaw. On one side, you have staplers, and on the other, pens. You can swap more staplers for fewer pens or vice versa, but you can’t go over $100. Each time you add a stapler to your basket, you'll have less to spend on pens. This way, the budget constraint guides you in balancing your needs and wants.

• You can buy 10 staplers if buying only staplers since they are $10 each.
• Or, you can choose to buy 40 pens only at $2.50 each.
• Or, a mix of both, staying within the $100 cap.

Consumer Choice

Consumer choice involves deciding how to allocate your limited resources, such as money, between competing demands for goods and services. When making purchases, consumers evaluate what’s most valuable to them. Would you want more staplers or more pens? Every choice reflects personal preferences and constraints, like budget. Every consumer experiences a unique set of preferences. Some might value staplers more if they often use staples at work, while others may need a surplus of pens for taking notes. Underpinning these preferences is the idea of maximizing utility—the happiness or satisfaction gained from a product.
So, when deciding whether to buy a stapler or a pen, a consumer weighs aspects like

• Utility: How much satisfaction does each additional stapler or pen bring?
• Substitution Effect: Are more pens a substitute for one more stapler?
• Income Effect: How does the purchasing of each good alter overall buying power?

Consumers aim to make the choice that offers the most utility within the boundaries of their budget constraint.

Market Pricing

Market pricing plays a crucial role in consumer choices, as consumers often compare prices to decide how to allocate their funds. The price of goods, like our staplers and pens, determines how much of each can be purchased within a fixed budget. If you understand the concept of market pricing well, you gain insight into why staplers might be heftier in cost than pens. Pricing reflects many factors, such as the supply and demand dynamics in the market. If staplers are pricier, it might be due to a lower supply or higher demand for them compared to pens. Market prices dictate opportunity costs and help in strategizing spending decisions.

• If the price of pens rises, you might decide to swap some pens for a stapler.
• If staplers go on sale, suddenly you can afford to consider purchasing more than before.
• Your task is to stretch those $100 smartly, by observing and responding to ever-changing market prices.

Thus, consumers need to stay aware of current pricing trends, not only based on necessity but also to get the highest value for each dollar spent. By paying attention to market pricing, consumers can optimize their purchasing power effectively.