The table below shows the scale of preference of a student - Mr Smith whose disposable income is $7.00. Use the information in the table to answer the auestoins that follow.
Items needed
Price ($)
Textbook
5.00
Shirt
2.00
Shoes
3.00
Trousers
3.00
Notebook
1.00
School fees
7.00
Mattress
10.00
(a)(i) What will Mr. Smith spend his money on? (ii) Explain your answer in 2(a)(i). (b)(i) What is the opportunity cost of Mr. Smith's decision in 2(b)(i)? (ii) Explain your answer in 2(b)(i). (c)(i) If Mr. Smith's disposable income increases to $10.0, what will he spend it on? (ii) What is the opportunity cost of the decision in 2(c)(i)? (d) Define "scale of preference" and "opportunity cost". (e) What is the importance of a scale of preference?
Explanation
(a)(i) Textbook and shirt (ii) Because the textbook and the shirt are the items at the top of his scale of preference which can be purchased with his $7.00 (b)(i) The shoes, the trouser and the notebook (ii) Because those three items are the next best alternatives, which can be purchased with $7.00 (c)(i) Textbook, shirt and shoes (ii) Trouser, the notebook and pay $6.0 out of his school fees. (d) A scale of preference is a list of wants arranged in order of importance. Opportunity cost is the alternative want or commodity forgone (e) A scale of preference helps an individual, a firm or a government to make rational use of available resources to satisfy the most important wants.
