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.

AA university has only 500 parking spaces near campus. Students, faculty, staff, and visitors all want to use them, but not every group can be fully satisfied at the same time.

BA student attends a review session instead of working a $40 shift. The work shift is the student's next-best alternative forgone.

CA student paid a nonrefundable $25 registration fee last week. The fee cannot be recovered regardless of what the student chooses today.

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 Drive-Thru Draft Order Complete screen showing the final tray, total score, and opportunity-cost calls.

Example final screen

Submit your result

QR code linking to the Google Form for submitting the Drive-Thru Draft result screenshot.

forms.gle/jGYgg1pMaJJvziAT8 ↗

Scan → upload screenshot → submit

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?

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?

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

How much is attributable to the farm sector?

A bag of frozen vegetables sells for $8.00 at a grocery store. The farm share is 22.5%. How much of the retail price is attributable to the farm sector?

A$1.20

B$1.80

C$2.25

D$5.75