# ECON Final Notecard Essay

Submitted By kml810
Words: 4458
Pages: 18

1. You are a jewler so you can buy and sell gold at market price. Last month you bought 1 ounce for \$1,600. The current market price is \$1,700. If you are asked to make the gold into a ring, what is the opportunity cost of using the gold? What if it is now \$1,500 an ounce? Explain. In both parts a and b the opportunity cost of the ounce of gold is the market price. The opportunity cost is the best alternative use for the gold. Because you buy and sell gold, you always have the option of selling the ounce of gold. In part a, you can sell the ounce of gold for \$1,700, so if you use it for a ring, you have foregone the opportunity to sell it for \$1,700. Hence \$1,700 is the opportunity cost ofthe gold in part a. In part b, you can sell the gold for \$1,500, so if you use it for the ring, you have foregone the opportunity to sell it for \$1,500. Yes, you initially paid \$1,600 but that payment is a sunk cost—it has been made and nothing can change it. So the opportunity cost of the ounce of gold in part b is \$1,500. The main point here is that what you initially paid for the gold does not affect the opportunity cost of using it. That opportunity cost will be influenced by the current price of the gold not its historical price.