Question

Suppose that you are given a 100 dollar budget at work that can be spent only on two items: staplers and pens. If staplers cost 10 dollar each and pens cost 2.50 dollar 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.

Step-by-step solution

Understanding the budget constraint

You have a $100 budget. You can spend this budget on staplers or pens. Staplers cost $10 each, and pens cost $2.50 each. Your total spending on both items cannot exceed $100.

Calculating how many pens can be purchased instead of one stapler

Since one stapler costs $10, the opportunity cost of buying one stapler is the number of pens you could buy with the same $10. To find the number of pens you can buy with $10, divide $10 by the price of one pen, which is $2.50.

Performing the calculation and interpretation

Calculate the number of pens that can be purchased with $10: \[\frac{10}{2.50} = 4\] This means you can buy 4 pens instead of one stapler. Therefore, the opportunity cost of buying one stapler is 4 pens.

Key concepts

Budget Constraint

In the world of economics, a budget constraint is a fundamental concept that limits the amount you can spend based on your income or budget. Think of it like having a set amount of money in your wallet, and you have to decide how to allocate it for your purchases. In our exercise, the budget constraint is the $100 you have to spend on staplers and pens. Given that a stapler costs $10, and a pen costs $2.50, you can see how you are restricted in how many of each you can buy.

With a budget constraint, every purchase decision matters. Buying one item means giving up the opportunity to buy others, which leads us to the concept of opportunity cost. The key here is balance. You need to determine what combination of items fits your budget and satisfies your needs. A budget line can be drawn on a graph where the x-axis represents one good (e.g., pens) and the y-axis represents another (e.g., staplers). Any point on this line represents a combination of goods that utilizes your entire budget.

• This tool allows you to visualize all the possible choices you can make within your budget.
• It also helps you to understand trade-offs between different goods.

Microeconomics

Microeconomics dives into the smaller-scale economic decisions, focuses on how individuals, households, and businesses make choices about resource allocation. In this context, the problem from your textbook illustrates a microeconomic scenario where you, as a consumer, need to decide how best to allocate your $100 budget between staplers and pens.

Microeconomics also examines how these decisions affect the supply and demand for goods and services, which in turn determines prices. In a broader sense, microeconomics studies how these small choices stack up to shape larger market dynamics. It asks questions like, "Why do consumers make certain choices?" and "How do they respond to changes in price?" These inquiries go beyond just numbers and equations to explore the motives behind human behavior when faced with limited resources.

From optimizing product price to understanding market behavior, microeconomics provides the groundwork for making informed decisions,

• which can lead to an efficient allocation of resources.
• ensuring that businesses know how shifting prices affect consumer decisions.

Consumer Choice Theory

Consumer choice theory is the study of how people decide to spend their money based on their preferences and budget constraints. It's like a roadmap that guides consumers towards making their most satisfactory choice among various options. Imagine you're at a store with your $100, weighing the benefits of buying staplers versus pens.

This theory considers several factors influencing your choice, such as personal preferences, the prices of goods, and your income or budget. A critical element here is understanding that using your budget towards one item (e.g., buying a stapler) means you are giving up the chance to purchase other items (like the pens), which is the essence of opportunity cost.

Your decision-making process integrates:

• Your preferences among the available goods.
• Price sensitivity and the substitution effect, where you might opt for lower-priced items if prices rise.
• Balancing your budget to get the optimal combination of goods.
  
  

This plays out in your decision: Is the added utility from owning a stapler worth the opportunity cost of four pens?