Question

2. The 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.

(a)(i) What will Mr. Smith spend his money on? (ii) Explain your answer in (a)(i).
(b)(i) What is the opportunity cost of Mr. Smith's decision in (a)(i)?
(c)(i) If Mr. Smith's disposable income increases to $10.00, what will he spend it on? (ii) What is the opportunity cost of the decision in (c)(i)?
(d) Define “scale of preference” and “opportunity cost”.
(e) What is the importance of a scale of preference?

Accepted Answer

(a)(i) Mr Smith will spend his money on the Textbook and Shirt, which cost $5.00 and $2.00 respectively (totalling his $7.00).
(ii) The scale of preference reveals that the textbook and shirt are the items most needed by the student, since they appear first and second on his list of priorities — the scale of preference reveals the order of importance of items to the consumer.

(b)(i) The opportunity cost of Mr. Smith's choice is shoes, trousers and notebook, because these three items together also sum to $7.00 — they represent the best alternative forgone.

(c)(i) If his income increases to $10.00, Mr. Smith will purchase the Textbook, Shoes and Shirt, which together cost $10.00.
(ii) The opportunity cost of this decision is trousers, notebook and part of the school fees that could have been paid for instead.

(d) Scale of preference is the list of wants/items arranged in their order of importance/priority. Opportunity cost is the benefit of the best alternative forgone when a choice is made.

(e) A scale of preference helps the economic agent to ration his limited resources in the best way, ensuring resources are spent on the most important items first, with the help of the scale of preference.

WAEC Economics 2013 Theory — Question 2

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