ARE 201 · Unit 2
Review Session
Concept review
Scarcity
Scarcity exists because resources are limited relative to competing wants and uses.
Practice · Scarcity
Which situation best illustrates scarcity?
Choose the description that shows limited resources relative to competing wants and uses.
Concept review
Sunk Cost
A sunk cost has already been incurred and cannot be recovered. It should be ignored when making the current decision.
Concept review
Opportunity Cost
Opportunity cost is the net value of the next-best feasible alternative forgone when a choice is made.
Opportunity cost activity
Play Drive-Thru Draft and submit your tray
Open the game ↗
drtremendous.netlify.app/drive-thru-draft-oc
1Open the game on your phone or laptop.
2Complete the draft and make each opportunity-cost call.
3At “Order Complete,” take a screenshot of your final result tray.
4Scan the Google Form QR code and upload the screenshot.
Example final screen
Practice problem 1
Work or Law School?
You must choose one of three mutually exclusive paths for the next year.
Work: net value of $60,000. Attend law school: $100,000 in future earnings benefits, $50,000 in tuition, and $10,000 in difficulty from studying. Public-service fellowship: a $35,000 stipend, $25,000 in experience and satisfaction, and $10,000 in required expenses.
Assumption: all values are comparable, and there are no other relevant benefits or costs.
1Calculate the net value of each alternative.
2Rank the three alternatives from highest to lowest net value.
3If you attend law school, what is your next-best feasible alternative?
4What is the opportunity cost of attending law school?
5Which option would maximize net value?
6For Tom, replace the $10,000 study difficulty with his personal value of studying law, s. How large must s be for law school to be at least as valuable as every other option?
Work or Law School · Question 1 of 6
Calculate the net value of each alternative
WorkNet value: $60,000
Law school+$100k benefit; -$50k tuition; -$10k study cost
Fellowship+$35k stipend; +$25k experience; -$10k expenses
Work or Law School · Question 2 of 6
Rank the three alternatives
Which ordering goes from highest to lowest net value?
Work$60,000
Law school$40,000
Fellowship$50,000
Work or Law School · Question 3 of 6
If you attend law school, what is the runner-up?
Identify the next-best feasible alternative—not every option you reject.
Work$60,000
ChosenLaw school
Fellowship$50,000
Work or Law School · Question 4 of 6
What is the opportunity cost of law school?
Use the runner-up rule and the course definition of opportunity cost.
Work$60,000 net value
Law schoolChosen option
Fellowship$50,000 net value
Work or Law School · Question 5 of 6
Which option would maximize net value?
Choose among the three complete, mutually exclusive alternatives.
Work$60,000
Law school$40,000
Fellowship$50,000
Work or Law School · Question 6 of 6
How much must Tom value studying law?
Tom's law-school value is s. When is law school at least as valuable as every other option?
Work$60,000
Law school$100k - $50k + s
Fellowship$50,000
Practice problem 2
The Marshmallow Choice
A child may eat one marshmallow now or wait 15 minutes and receive two marshmallows.
Let u1 be the value of eating one now, u2 the value of each delayed marshmallow, and c the cost of waiting. The net values are u1 for eating now and 2u2 - c for waiting.
Assumption: these are the only two feasible alternatives.
1What is the net value of waiting?
2If the child eats now, what is the opportunity cost?
3If the child waits, what is the opportunity cost?
4Under what condition does eating immediately have the higher net value?
5Why might different children make different choices?
The Marshmallow Choice · Question 1 of 5
What is the net value of waiting?
Combine every benefit and cost created by the waiting option.
Eat nowValue = u1
WaitTwo marshmallows, each worth u2
Waiting costc
The Marshmallow Choice · Question 2 of 5
If the child eats now, what is the opportunity cost?
Evaluate the one alternative the child gives up.
ChosenEat now
Forgone alternativeWait
Runner-up ruleUse its net value
The Marshmallow Choice · Question 3 of 5
If the child waits, what is the opportunity cost?
Keep the chosen option's waiting cost separate from the forgone alternative.
Forgone alternativeEat now
Value forgoneu1
Cost of chosen optionc
The Marshmallow Choice · Question 4 of 5
When does eating immediately have the higher net value?
Compare the net values of the two complete alternatives.
Eat nowu1
Wait2u2 - c
Decision ruleChoose the larger net value
The Marshmallow Choice · Question 5 of 5
Why might different children make different choices?
Choose the explanation most consistent with economic reasoning.
Immediate valueu1 can differ
Delayed valueu2 can differ
Waiting costc can differ
Concept review
Farm Share
Farm share is the percentage of the retail food dollar attributable to the farm sector.
Farm-sector amount = retail price × farm-share percentage
Farm share is not farmer profit.
Practice · Farm Share