Answer to Question #90409 in Microeconomics for arshdeep singh

Question

2. Suppose there are two identical gold bars that you own. The only difference between them is how you acquired them. One bar was won as a prize, the other you purchased.

a. What is the difference in the cost of retaining ownership in the two bars? Explain. (hint: recall the distinction between accounting and opportunity costs).

b. Will there be any predicted difference in the use of the bars? Explain

Answer 1

a) The cost of retaining ownership in the two bars is completely different. The accounting cost of the prize equals to 0, and for purchased bar it equals to its price. Opportunity cost of the purchased bar equals to the value of the most valuable choice out of those that were not taken in order to buy the bar. Opportunity cost of the prize can be much greater than for purchased bar, because it can cost a lot of time for trainings, which could be spent for earning money.

b) The purchased bar can be used for practical purposes, while the prize is appreciated as the symbol.