Question

Question (ii)

Question 2 Jack is an Associate Degree student and lives in Aberdeen. Every Saturday morning, Jack works as a part-time waiter for 3 hours in a local café in Aberdeen. The hourly rate is $80. Currently, he is thinking of buying a smart phone based on his budget. The maximum amount he plans to buy for a well-functioned second-hand smart phone is $6,500. Then, Jack finds that a second-hand smart phone with a broken screen is offered for sales on Internet at $5,000. Jack expects that it involves extra cost of repairing it to make it to be a well-functioned one. He contacted the seller, Sam, and they agree to meet at Tin Shui Walto make the transaction coming Saturday morning. Jack needs to spend 3 hours on travelling for the round-trip and costs him $50 for the bus fares. In order to make himself available for this appointment, Jack has informed the café manager that he cannot come to working coming Saturday. 10 Define opportunity cost. What is Jack's total opportunity cost of buying this second-hand smart phone from Sam? Explain with relevant data. (7 marks) (ii) As the second-hand smart phone offered by the seller, Sam, is the one with a broken screen, Jack needs to pay an extra cost of repairing the broken screen and this amount is unknown at the moment. Imagine that you were Jack's best friend. How can you make use of the concept of 'rational choice in Economics to help Jack to make his decision - whether Jack will buy this second- hand smart phone from Sam or not. Explain with a simple cost and benefit analysis of THREE possible scenarios of Jack's decision and support with relevant data obtained. (13 marks)

Answer 1

1) The opportunity cost is the benefits forgone for choosing the next best alternative.
Jack could buy the smartphone with broken screen but then he will have to repair that and for that he will have to forfeit the income for the day. Also he will incur the commuting cost.

50 + ( 80 * 3 ) = $290

2) The rational choice theory is the theory which assumes that the individuals or states are rational actors. They make decisions on the basis of information they have that is assumed to be sufficient to make an informed decision.
The individuals compare the course of action such that includes the benefits and costs of the decision and then they choose the best option. The option is the scenario where the individual or the states will have maximum net benefits.

The rational decision in this case hinges on the expected cost of screen repairing. If that cost is upto $1000 then still it is a rational choice to buy that phone with broken screen. This is because he will be saving $1500 with that phone and opportunity cost for that repairment is $290. he would be in profit of $200 in that case.
However, if the cost of repair is $1200 or above then obviously he has no gains from that.