Theory question 102
Basic ConceptsThe table below shows the scale of preference of a student – Mr. Smith whose disposable income is $7.00. Use the information in the table to answer the questions that follow.
Items Needed | Price ($)
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(a)(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?
Show the model answer
(a)(i) The textbook ($5) and the shirt ($2).
(ii) They are his first two wants on the scale of preference and together cost exactly his $7.
(b)(i) The shoes.
(ii) Shoes are the next item on his scale that he must forgo because his income is used up: the best alternative forgone.
(c)(i) Textbook, shirt and shoes ($5 + $2 + $3 = $10).
(ii) Trousers, the next item forgone.
(d) Scale of preference: a list of a person's unsatisfied wants arranged in order of importance. Opportunity cost: the alternative forgone when a choice is made (the next best alternative sacrificed).
(e) Any of: helps the consumer make rational choices; ensures the most pressing wants are met first; helps get maximum satisfaction from limited income; helps in planning and budgeting; helps governments and firms set priorities.
Satisfy wants in order from the top of the list until the income is spent.