Exercises: The economic problem: scarcity and choice

Explain what scarcity is and why it forces us to choose. Illustrate this using your weekly allowance: two things you would like to buy, which one you give up if you choose the other, and what that means.

Define opportunity cost and calculate it in this case: on Saturday you can go to the cinema ($\$160$ per ticket) or to your cousin's birthday party, but not both. If you choose the cinema, what is your opportunity cost? Explain why it is not just the price of the ticket.

The school cooperative divides its small workshop between making bracelets and making keyrings for the market. The diagram shows its production possibility frontier with three marked combinations: A, B, and C.

1. a) Explain what each point — A, B, and C — indicates about how the workshop is using its resources.
2. b) At point A, $40$ keyrings and $30$ bracelets are produced per day. What would the cooperative have to sacrifice to make more keyrings? What is this sacrifice called?

Each day, the cooperative can produce these combinations of bracelets and keyrings: $(0, 60)$, $(20, 50)$, $(35, 35)$, $(45, 15)$, and $(50, 0)$, where the first number is bracelets and the second keyrings.

1. a) Calculate the opportunity cost, in keyrings, of moving from $20$ to $35$ bracelets.
2. b) Calculate the opportunity cost of moving from $45$ to $50$ bracelets and compare both stages: does increasing bracelet production become increasingly costly? Why do you think this happens?

You are considering studying for 'one more hour' before the math exam. That hour would come out of your basketball practice. Explain what the marginal benefit and marginal cost of that extra hour compare (thinking 'at the margin'), and argue at what point studying for another extra hour would no longer be worth it.

The school canteen used to give away free plastic bags and used $500$ a week; since it started charging $\$2$ per bag, it uses $50$. Explain what an incentive is and how it worked in this case, and propose two incentives (one reward-based and one price-based) to get students to recycle more in the schoolyard.

For the end-of-year trip, your class has $\$20\,000$ and three options: (a) a day at the theme park ($\$20\,000$), (b) two days of outdoor adventure with hostel stay ($\$18\,000$), or (c) a day out together at the beach ($\$6\,000$) and donating the remainder to the local soup kitchen.

1. a) Calculate the opportunity cost of each option in pesos and in experiences.
2. b) Choose one option and defend it, arguing what values guide your decision beyond money.

'This app is free.' A social network does not charge for its use, but it displays adverts and tracks everything you look at. Analyse what you are really paying for this 'free service', who benefits, and how this relates to the idea that making choices always incurs a cost, even when there is no price tag.

In a coastal town, parking next to the beach used to be free, and in August it was impossible to find a space. The municipality set a price of $\$40$ per hour, and now residents are debating: some say that 'the beach belongs to everyone' and others that 'at least this way there is turnover and spaces open up'.

1. a) Explain the underlying economic problem when a scarce resource has a zero price tag.
2. b) Analyze what incentives the new measure creates and propose an alternative way to allocate the resource without using prices, weighing its pros and cons.