Question

4. What is the opportunity cost in each of the following situations? You do not need to explain your answer, but you should be as precise as possible. (14%) a) "I have an option between three jobs: I can work as a professor and make $150,000 per year, I can work as a consultant and make $200,000 per year, or I can work as an investment banker and make $300,000 per year. If I choose to work as a professor, and I only care about money, what is my opportunity cost?" b) "I do not care about money, but only about pleasure. It gives me the greatest pleasure to serve God as a priest. Following that, it gives me great pleasure to drive fast cars. Finally, it gives me the least pleasure to start a business and make lots of money. What is my opportunity cost of starting a business and earning much money?" c) Suppose that John is an elite athlete, and has a choice between either playing for the NBA or the NHL. In either case, he would earn a salary of $1,000,000. Assuming he only cares about money, what is his opportunity cost of becoming a NHL hockey player? d) "It is a Wednesday night, and I have a choice between two actions: studying math, or studying economics. What is my opportunity cost of studying economics?" e) "There are five places I could go for vacation. My favourite spot would be the Amalfi Coast, followed by Bhutan, and then Kentucky. Tied for last are London and Toronto. Money is no barrier, and I care only about the pleasure. What is my opportu- nity cost of going to the Amalfi Coast?" f) "I can either spend my $500 now, or save it and earn $50 in interest over two years. What is my opportunity cost of spending my money now?" g) Assume the following annual costs of attending university: tuition ($10,000), books ($2,000), and housing/maintenance ($25,000), If you did not attend university you would work as a journeyman plumber, with a salary of $30,000 and an annual hous- ing/maintenance cost of $25,000. What is your opportunity cost of attending university?

Answer 1

In economics opportunity cost is refers to the value of the next highest valued alternatives that can be done using the same resource. Thus opportunity cost = Returns on the best option not chosen- return on the option chosen

a) alternative best option of working as professor is working as an investment banker as money is the thing that only matters here thus opportunity cost will be = $300000-$150000=$150000

b)opportunity cost of staring business and earn own money is to serve god as priest as here only pleasure matters

c)There will be no opportunity cost as he will earn same money in both the cases and he is only bothered about money here

d)Here is it obvious that the opportunity cost studying economics is not studying math

e) here without Amalfi cost , best high pleasure return place is Bhutan thus if the individual goes for Amalfi coast then the opportunity cost will be not going to Bhutan

f)If i spend the money now I will loose the int that I can have after 2 years, thus mu opportunity cost of spending money right now is 50 but here we should consider the rate f inflation to compute the real opportunity cost

g) If I attend the university I have to give up the job thus my opportunity cost will be $300000+$250000=$550000