INTRODUCTION TO ECONOMICS

HANDOUT

OPPORTUNITY COSTS:

Three university of engineering students are considering operating a mobile

car clinic in Florida, during their summer break. this is an alternative to
summer employment stacking plastic cups at a local injection modeling
manufacturer where they would earn $8,000 each over the three-month
summer period. A van equipped for such service can be leased at a cost of
$4,500 for the summer from an owner taking a long vacation in the
Bahamas. Additional projected costs are $2,500 for insurance, and $5 per
service call for materials and supplies. Their service calls would be priced at
$30 per unit, plus any parts costs (parts will not be inventoried, but
purchased from local parts outlets)

1. what is the accounting cost function for this business(ignoring parts)?

2. what is the economic cost function for this business?

1. Suppose Ted the track team trainer can produce two outputs, fast runners (R) and strong
shot putters (S). If Ted works 40-hours per week, Ted’s production possibilities frontier (PPF)
per semester for these two outputs is given by the equation:
S = -(1/3) R + 5
Or
R = -3S + 15 
a. Complete the following table:

b. Graph Ted’s PPF for runners and shot putters in Figure below. Measure shot putters on the
horizontal axis.

c. Suppose Ted is currently producing 0 shot putters. What is Ted’s opportunity cost of
increasing his production of shot putters from 0 to 2?

d. Suppose Ted is currently producing 2 shot putters. What is Ted’s opportunity cost of
increasing production of shot putters from 2 to 4?