ECON 200 Assignment 1
1. Explain the concept of opportunity cost. How is it related to scarce resources and trade-offs?
An opportunity cost of an item is what you give up to get that item. For example, a person
who has $12 can choose to go to the movie theatre or purchase a shirt. If the person chooses to go to
the movie theatre, the opportunity cost is the shirt. If he buys the shirt instead, the opportunity cost
is the movie forgone.
When there are scarce resources, people are forced to make choices, which involve
opportunity costs. When making their choice(s), they have to consider the tradeoffs of picking one
option over the other. A teenager who has just graduated high school cannot decide whether to
travel through Europe or to go to college immediately. His most valuable resource, time, does not
allow him to do both. For each day he spends on his trip, he has one less day for college. 10/10
2. Why is it important to think at the margin in order to make optimal decisions? Provide an
example using marginal costs and marginal benefits.
Thinking at the margin is important in making optimal decisions because it allows one to
maximize the benefit of each small incremental change, increasing the rate for success of the overall
objective(s). It also helps a person to take or avoid action by comparing the marginal benefits with the
marginal costs. Let’s use an example involving a yoga studio. Each class allows a maximum of 10
visitors and costs an average of $100 ($10 per visitor) to operate. If a class is half-empty, the
instructor still decides to teach the class. The marginal cost is only the use of the yoga equipment and
the instructor’s time. The marginal benefit is the profit made on each admission, above the average
cost of running the class. 9/10
