EXERCISE 1: opportunity cost
J. Wahl – Micro Principles
Much of what economists do is construct a good framework within which they can
answer questions. The answers themselves will depend upon data and empirical
evidence, but this exercise is designed simply to get you thinking about asking the right
questions.
PART 1: Please consider the following 4 alternatives.
First, try to ascertain the objective of the named party.
Next, craft a set of questions that would help you ascertain which alternative best
meets this objective, keeping opportunity cost in mind as an underlying concept.
Finally, consider whether the alternative chosen could carry “external” costs and
benefits relevant to society but not necessarily considered by the named party.
1: Named party: City council members
Alternative: Cul de sacs or grid system of streets in a new subdivision
Resource article: "Cities look harder at cul-de-sacs"
2: Named party: Corporate product managers
Alternative: Cloth or disposable diapers
Resource article: "Cease-fire in diaper wars"
3: Named party: Neighborhood association
Alternative: Permit or exclude pawnshops in the local business district
Resource article: "Pawnshops"
4. Named party: President Rob Oden and the Carleton Board of Trustees
Alternative: Use new $100 million gift for need-based aid or for merit-based aid
Resource article: at least the executive summary of the paper located at
http://www.mnprivatecolleges.org/userFiles/File/Research/bigger_bang(2).pdf
PART 2: A couple of other interesting questions, also having to do with opportunity
cost:
5. Suppose you are a group of city planners, contemplating the congestion of the
surrounding freeways. Would widening the roads decrease congestion? Explain why or
why not. Resource article: "Does widening the interstate . . . "
6. Suppose you are a panel of expert economists, asked by a judge to calculate the
appropriate settlement amount in certain tobacco cases. In these cases, the plaintiffs are
various states (including Minnesota) that claim they have incurred additional Medicaid
and Medicare costs for smokers. Determine how you might ascertain these incremental
costs, which would be paid by the defendant tobacco companies if they are found liable.
Note that I am NOT asking you to comment upon liability. Resource article: “Light one
up for Social Security.”