Question

Question 2 Jack is an Associate Degree student and lives in Aberdeen. Every Saturday morning. Jack works as a part-time waiter for 3 hours in a local café in Aberdeen. The hourly rate is $80. Currently, he is thinking of buying a smart phone based on his budget. The maximum amount he plans to buy for a well-functioned second-hand smart phone is $6,500. Then, Jack finds that a second-hand smart phone with a broken screen is offered for sales on Internet at $5,000. Jack expects that it involves extra cost of repairing it to make it to be a well-functioned one. He contacted the seller, Sam, and they agree to meet at Tin Shui Wai to make the transaction coming Saturday morning. Jack needs to spend 3 hours on travelling for the round-trip and costs him $50 for the bus fares. In order to make himself available for this appointment, Jack has informed the café manager that he cannot come to working coming Saturday. (0) Define opportunity cost. What is Jack's total opportunity cost of buying this second-hand smart phone from Sam? Explain with relevant data. (7 marks) () As the second-hand smart phone offered by the seller, Sam, is the one with a broken screen, Jack needs to pay an extra cost of repairing the broken screen and this amount is unknown at the moment. Imagine that you were Jack's best friend. How can you make use of the concept of 'rational choice' in Economics to help Jack to make his decision - whether Jack will buy this second- hand smart phone from Sam or not. Explain with a simple cost and benefit analysis of THREE possible scenarios of Jack's decision and support with relevant data obtained. (13 marks) -END OF PAPER

Answer 1

Opportunity cost of anything is next best alternative cost which is forgone. At that time to get the one commodity we have to forgo the another commodity. This is called opportunity costs.

In this scenario Jack is forging new smartphone which is next best alternative available for him and can be purchased in place of old smartphone from Sam.

If Jack choose for New Smartphone, then;

$50 - Traveling cost.

($80 × 3hrs)= $240 - Sum of money which could earn on Saturday.

Sum total of $290 ( $240+$50) which he would not have to incur while buying new smartphone.

So, ($290 + $5000) = $5290 Jack's total opportunity cost of buying this second hand smartphone from Sam. (As reparing cost is unknown, so can't comment on it.)

From the following information:

Jack's has been offered old smartphone at $5000 with broken screen. While his budget is of $6500.

Rational choice means assumption and prediction of certain outcomes, considering all relevant data which would be in his favour.

Whether Jack should purchase second hand smartphone, it totally depends upon certain scenarios considering his budget;

1) If after incurring reparing cost to make it well functioned, total cost (ie.$5000 purchase cost + $50 travelling cost + Reparing cost) will fall below $6500, then he can accept this offer. Or

2) If he can get new smartphone at or below $6500, then he should reject offer from Sam and go for a new smartphone. ( He can also save $240, which he has to forgo on Saturday while purchasing old smartphone from Sam).

3) This is extension of (1) scenario that is, if Jack incur total cost $6500 for acquiring old smartphone, then here is some additional cost that he has to bear ie. $240 Which is not included in his budget then his total cost/budget would be $6740.

So if he can acquire new smartphone above $6500 but below $6740, Then Jack should purchase new smartphone. As he would get new smartphone at same budget rate.