Managerial Economics

Digital Headstart Module

Session 1
Practice Problems Answer Key

Practice Problem 1: You are considering joining the PGP, when your company offers you a promotion
to lead its newest project in Manila, requiring you to move there. You won't be able to join the PGP if
you are in Manila.

a) What is the opportunity implicit cost of taking the promotion?

Opportunity Implicit cost of a particular alternative is the payoff associated with the best of alternatives
that are not chosen. Therefore, opportunity the implicit cost of taking the promotion is whatever
benefits you would have enjoyed from joining the PGP since you will have to forego joining the PGP in
order to take the promotion.

b) How does the answer change if you have already paid the deposit for the PGP tuition?
The deposit paid for the PGP tuition has been explicitly incurred but it should not be factored into
decision making. These kinds of costs are known as sunk costs. Ideally, sunk costs should have no
bearing on future decisions.

c) You believe that the promotion is the better alternative for your career but are still hesitant to
accept the job because of the money you have paid towards the PGP tuition. Explain what
may be going on?
It is harder to let go of something once one has spent time, effort and money on it. In this case, you
know that promotion is the better alternative for your career but are still hesitant to accept the job
because of the money you have paid towards the PGP tuition. You fail to recognize that the deposit is a
sunk cost and it should not affect your future decisions. This is the sunk cost fallacy.

Practice Problem 2: A team consisting of three people is working on a big project, which involves
manual entry of data in a computer, with subsequent processing of these data and making a poster
presentation. Naturally, each member of the team has different abilities in performing either task.
Amrit can make 1 poster or 400 data entries in a day. Hard-working Binita can make 2 posters or 1200
data entries in a day. Artistic Chhavi can make 3 posters or 900 entries in a day.

a) As the time comes to start making posters, you decide to assign one member of the team to
this task. Whom would you choose? Explain why.
Opportunity cost of producing 1 extra
Posters Data Entries
poster in terms of data entries given up
Amrit 1 400 400
Binita 2 1200 600
Chhavi 3 900 300

Chhavi should be chosen to make posters as her opportunity cost is the lowest.

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 Managerial Economics
Digital Headstart Module

b) What is the opportunity cost of a poster at the choice made by you?

If Chhavi makes the poster, the opportunity cost for each poster she makes is 300 data entries that she
wouldn’t be able do.

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