Question

Brainstorm common items that you think consumers pay too much for or that you think are overpriced (i.e. movie theater popcorn, brand name items, souvenirs,, etc.). Now think of something more specific, either something that you or someone who know has purchased. For example, I know someone with a baby who was traveling and purchased a small pouch of baby food for $2.00, when even more baby food could have been purchased in a jar for around $0.50.

Write about your example, then use the principles you’ve learned about (like scarcity, opportunity cost, rationality, and marginal analysis) to explain why a person would make the decision to purchase that good.

Answer 1

An example of an overpriced item is designer clothing. This decision can be explained by scarcity, rationality, and marginal analysis.

Step-by-step explanation:

An example of an item that a person may purchase even if it is overpriced is designer clothing. Let's say someone wants to buy a t-shirt that has a popular brand logo on it. This t-shirt may cost $50, while a similar plain t-shirt without any branding may only cost $10. Despite the significant price difference, some people may still choose to buy the expensive branded t-shirt.

This decision can be explained by the concept of scarcity. The branded t-shirt may be limited in supply and seen as more exclusive and prestigious. By purchasing it, the person may feel a sense of belonging to a particular group or demonstrating their social status.

Additionally, the concept of rationality plays a role. People often make purchasing decisions based on emotions and personal preferences rather than purely logical reasoning. The desire to have a particular brand logo on their clothing may outweigh the consideration of cost.

Lastly, marginal analysis can explain this decision. Marginal analysis refers to the evaluation of the benefits and costs of obtaining an additional unit of a product. While the branded t-shirt may be more expensive, the individual may perceive the additional benefits, such as the perceived higher quality or the satisfaction of owning a recognizable brand, to outweigh the extra cost.

Answer 2

I took some work home because I had to meet an important deadline the next morning. If I am able to finish the work on time and do it correctly, then there is a chance of getting either a promotion or a pay raise. If I cannot complete it on time, I will not get fired, but any chances of a promotion or pay raise in the near will vanish.

Since I was working at home, I couldn't prepare anything for dinner, so I decided to buy food on a website and get it delivered home. I spent $20 on my dinner, even though I could have prepared a similar dinner for $5.

I was willing to pay for the expensive meal because the opportunity cost of preparing dinner instead was too high. I can afford to pay $15 more for eating, but I cannot afford to lose the opportunity of a promotion or a pay raise. Even if I do not get them immediately, not completing my job would have made it much harder to get it in the future.

My decision is rational because I was sacrificing a small amount of money in order to preserve something that is really valuable for me (promotion or pay raise).

All resources are scarce, and in this case, time was scarce. So I had to decide which action was more valuable and which action could yield a higher benefit.