Free Essay

# Econ

Submitted By cherrykcy
Words 1110
Pages 5
1)

For a maximizing individual, he will not pay more than he is willing to pay for a good. Hence, his marginal valuation of a good determines the maximum amount of other goods that he is willing to pay in order to obtain an additional unit of the good. As long as his marginal valuation is higher than the actual amount paid, he will continue to buy the good concerned. At the margin, he will pay the maximum of what he is willing to pay, otherwise his behavior would be inconsistent with maximization. Hence, what he pays at the margin his marginal valuation. When allocating one’s scarce resources, one has to incur cost whatever his decision will be. As cost is defined as the ‘highest-valued option forgone, whenever there is an option, there will be cost. However, since one’s resources can only be allocated to one use at one time, though there may be many options available, the cost of one’s activity is not equal to the sum of the options forgone. Hence, in deciding the cost of one’s action, only the highest-valued option forgone is considered as the cost of one’s action. This is because only this option is relevant in one’s decision making. Anything less than this highest sacrifice is irrelevant for decision making as even one does not choose the prevailing option, he will not choose an option which is not the highest-valued one.

2)

Cost is the defined as the highest-valued option forgone for an action. Cost exists whenever options exist for an action. As there are many options available but there is only one can be chosen as an option at a time, only the highest-valued option forgone will be his cost of choosing the option. Once an option is chosen, the cost of choosing such option will change only if there is a change in the value of the highest-valued option forgone. If someone lives in his own flat, his cost of living in that flat will be equal to the implied rental value of the flat. It is because he can receive rental income for letting the flat to others. If the value of that flat fell by half, the rental value for letting the flat will also fall by half. Hence, his cost of living in that flat has gone down.

3)

Before using the supply-demand diagrams to resolve the water-diamond paradox, it is better for us to clarify the concepts o fuse value and exchange value. Since there are three types of use value, we have to clear about what type of use value we are concerned with. By total use value, it measures the maximum amount of other good one is willing to forgo in order to obtain a certain quantity of the good concerned. As for average use value, it measures the maximum amount of other good on average one is willing to forgo in order to obtain certain of the good concerned. While for marginal use value, it measures the maximum amount of other good one is willing to forgo in order to get an extra unit of the good concerned. As marginal use value is diminishing when more of a good is being possessed, the marginal use value curve is also downward sloping curve. As long as marginal use value is positive, when more is being possessed, the total use value will keep on increasing while the average use value will fall continuously. As a maximizer, one will purchase a good as long as the use value one obtains form possessing a good is greater or equal to the price paid. Thus, under a uniform price arrangement, one will buy until price is equal to the marginal use value of the last unit possessed. Hence, the MUV curve is also the same as the demand curve.
According to the water-diamond paradox, water has a high use value while diamond has a low use value. Firstly, we have to be clear that what type of use value is concerned in this paradox. In fact the use value concerned is the total use value. Since the quantity of water is more abundant than that of diamond, more water can be used by people, the total use value of water will be higher than that of diamond. This explains why water has a high use value while diamond has a low use value.
As for the exchange value, it measures the amount of other good one is willing to forgo in order to obtain an additional unit of the good concerned. As mentioned above, the exchange value of a good is equal to the marginal use value of the last unit concerned. As marginal use value diminishes when more is being possessed, the greater the quantity, the lower the marginal use value will be. Since water in more abundant than diamond, the marginal use value of water will be lower than that of diamond. This explains why water has a lower exchange value than diamond. So, after clarifying the difference between total use value and marginal use value, we can find out why water has a high use value but low exchange value while diamond has a low use value but high exchange value. Moreover, since the total use value equals to the summation of MUV of all units consumed while the total exchange value equals to price, i.e. MUV of last unit concerned, times the quantity consumed, the total use value is greater than the total exchange value. The difference is known as consumer surplus. Thus, we can also conclude that the greater quantity, the greater the consumer surplus will be. Hence, users of water can enjoy more consumer surplus than users of diamonds.

4(a)
[pic]
There is inelastic demand for the tunnel service. Price will increase while demand decrease. Then the percentage change in price is greater than the percentage change in quantity demanded.

b(i)
[pic]
Cross Harbour Tunnel is a substitute of Western Harbour Tunnel.The demand of services for Cross Harbour Tunnel will increase.With a fixed price,the excess demand for Cross Harbour Tunnel service would increase as well.

b(ii) The opportunity cost increases because there is a need to spend more time and transport fee which has alternative uses.If Cross Harbour Tunnel has more people to use,traffic congestion will be more serious.Therefore,time cost increases as well as the fuel costs.

(c) No,it is because the highest valued alternative use of the time may be different for different tunnel users.

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