The table below shows the scale of preference of a student - Mr Smith whose disposable income is $7.00. Use the information in the table to answer the auestoins that follow.
| Items needed |
Price ($) |
| Textbook |
5.00 |
| Shirt |
2.00 |
| Shoes |
3.00 |
| Trousers |
3.00 |
| Notebook |
1.00 |
| School fees |
7.00 |
| Mattress |
10.00 |
(a)(i) What will Mr. Smith spend his money on?
(ii) Explain your answer in 2(a)(i).
(b)(i) What is the opportunity cost of Mr. Smith's decision in 2(b)(i)?
(ii) Explain your answer in 2(b)(i).
(c)(i) If Mr. Smith's disposable income increases to $10.0, what will he spend it on?
(ii) What is the opportunity cost of the decision in 2(c)(i)?
(d) Define "scale of preference" and "opportunity cost".
(e) What is the importance of a scale of preference?
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.
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.
