The table below shows the scale of preference of a student - Mr Smith whose disposable income is $7.00. Use the information in the table to answer the auest...

Mr Smith's disposable income is \$7.00. A scale of preference lists wants in order of priority, and he satisfies the most pressing wants first.

(a)(i) He will buy the Textbook (\$5) and the Shirt (\$2), which together cost exactly \$7.

(ii) These are the two items highest on his scale of preference that his \$7 can afford; buying them exhausts his income while satisfying his most urgent wants.

(b)(i) The opportunity cost of that decision is the Shoes (\$3), the next item on his scale that he had to forgo.

(ii) Opportunity cost is the next best alternative sacrificed. Having spent all \$7 on the textbook and shirt, he gives up the shoes, so the shoes are the real cost of his choice.

(c)(i) If income rises to \$10, he can add the shoes: Textbook (\$5) + Shoes (\$3) + Shirt (\$2) = \$10.

(ii) The opportunity cost is now the Trousers (\$3), the next item forgone.

(d) Definitions

• Scale of preference: a list of an individual's wants arranged in the order of their relative importance or urgency.
• Opportunity cost: the next best alternative that is given up when a choice is made.

(e) Importance of a scale of preference

• It guides rational choice by ranking wants in order of priority.
• It ensures the most pressing wants are satisfied first with limited income.
• It promotes efficient allocation of scarce resources and avoids waste.
• It makes the opportunity cost of a decision clear.