Question

Kamryn is deciding between three potential activities on Saturday evening 1) Staying at home and watching her favorite television show, an activity that she values at $18 and that entails no out-of-pocket costs. 2) Going to the movies with her sister to see the latest blockbuster action film, an activity she values at $30 and that entails $15 in out of-pocket costs. 3) Going out to dinner with her best friend, an activity she values at $40 and that entails $23 in out-of-pocket costs. a) Which activity should Kamryn choose? Going out to dinner with her best friend Going to the movies with her sister Staying at home and watching her favorite show b) What is Kamryn's opportunity cost of going to the movies? Instructions: If you are entering a negative number, be sure to include a negative sign (). $13 c) Relative to her next best alternative, what is Kamryn's economic surplus from going to the movies? Instructions: If you are entering a negative number, be sure to include a negative sign (). S15

Answer 1

Net Benefit from activities = Value Derived – Cost Incurred

Staying at home and watching television show = $18-0 = $18

Going out to movies with her sister = $30-$15 = $15

Going out to dinner with her best friend = $40-$23 = $17

Kamryn should choose activity with the highest net benefit

I.e. Staying at home and watching her favourite show

b)Opportunity Cost of going to the movies is the value of next best alternative i.e. Staying at home and watching her favourite show

i.e. $18

c)Economic Surplus from going to the movies = $15-$18 = -$3