Ans1A Essay

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Microeconomics: Week 1 Review Questions

1) Suppose that the wages of young high school graduates fell. In what sense has the true “cost” of a college education been changed by this development.

Other things equal, if wages of young high school graduates decline, the potential alternative use of time spent studying in higher education…namely, working with only a high school education…has relatively less value. Therefore, the opportunity cost of student study time measured in foregone wages is lower. Assuming no change in the explicit costs of higher education (tuition, fees& books), the opportunity cost decline has reduced the overall cost of higher education.

2)Suppose that a real estate developer buys a parcel of land for 3
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The magnitude of this opportunity cost depends on the difference between the rate of return that could be earned on these funds if they were invested in other assets and the rate of return that the checking account pays. For different investors with different attitudes towards risk, the alternative investments undertaken with their $2000 and the rates of return expected on those investments might differ. The opportunity cost of this minimum balance requirement for very risk averse investors is not as great as for those with greater risk tolerance, since very low risk investments have a lower rate of return than assets exposed to market risk.

4)Several years ago most major countries signed an agreement to phase out the manufacture of Chlorofluorocarbons (which were extensively used in the production of insulation panels in refrigerators and air-conditioners). How is the opportunity cost of this ban affected by the availability and cost of substitutes for Chlorofluorocarbons?

We will still need insulation for refrigerators, air conditioners and the like. But the ban will force manufacturers to switch to substitute materials and processes that utilize more human and material resources than were utilized in the production of CFC's. The additional resources which must be used in producing insulation after the ban reduce the resources available for use in other goods and services. These foregone other

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