B) 15 computers. A rational consumer would chose to work. It is important to compare investment options that have a similar risk. What if your friends were to ask you if you want to go out to the club? Every month I also have the option of attending a meeting of the whiskey club (open only to Club members), at a cost per meeting of $15, payable at the beginning of each meeting. You are willing to pay $80 for the concert and the concert ticket costs $50. However, businesses must also consider the opportunity cost of each option. If they're cautious about a purchase, many people just look at their savings account and check their balance before spending money. a. So the opportunity cost of buying an SUV includes an alternative option, such as buying a less expensive sedan. This is a particular concern when there is a high variability of return. 10 Ums. 5 pots . The golf takes four hours to play. a) I, II and III. We can lay the process out in three steps: If we want to change this into the process for a binary decision (yes or no): It is important to note that not all decisions are binary. 8. An opportunity cost example of trade-offs for an individual would be the decision by a full-time worker to take time off work with a salary of $50,000 to attend medical school with an annual tuition of $30,000 and earning $150,000 as a doctor after 7 years of study. Cars: 10. A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost. Option B, on the other hand is: to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of a different investment. Opportunity cost is the forgone benefit that would have been derived by an option not chosen. This is very simple. Therefore, the opportunity cost is the difference in value lost from producing a smartphone rather than a computer. Show transcribed image text. For the soap-making opportunity, she anticipates annual revenue of $465,000 and costs for the necessary land, labor, and capital of $395,000 per year. If I don’t loan my brother the $10,000, it will stay in my bank account for the year, where it will earn 2% interest. Suppose you have bought and paid for a ticket to see Lady Gaga in concert. Nevertheless, because opportunity cost is a relatively abstract concept, many companies, executives, and investors fail to account for it in their everyday decision-making. Society’s wants are unlimited, but ALL resources are limited (scarcity). Opportunity cost is equal to implicit costs plus explicit costs. Opportunity Cost is the cost of the next best alternative, forgiven. Skill: Analytic AACSB: Analytic Skills 10) The concept of opportunity cost can be applied to the analysis of _____ decision-making Seem high? In this example if you were to go clubbing opportunity costs are: Explicit Costs (cover, drinks and ride home) : $50, Implicit Costs (forgone income from 5 hours) : $75. Notice that the $60 is not included as an explicit costs because it is not an additional cost we have to incur as a result of working out. 15. Assume the expected return on investment in the stock market is 12 percent over the next year, and your company expects the equipment update to generate a 10 percent return over the same period. I. In essence, it refers to the hidden cost associated with not taking an alternative course of action. 15. If the opportunity cost of producing one car in Japan is 10 computers and the opportunity cost of producing one car in the United States is 5 computers, then the United States has a comparative advantage in computer production. The presence of sunk costs can affect future decision-making, if they are large enough. a) The $40 that I paid the gym this month. On the day of the concert, a friend offers you a free ticket to Lady Gaga instead. While the opportunity cost of either option is 0 percent, the T-bill is the safer bet when you consider the relative risk of each investment. The ‘willingness to pay’ represents how badly someone might want to go to the gym. 11. Therefore, the opportunity cost is … Likewise, if we move from point B to point A, we are giving up 1 leather jacket, and getting 2 more computers, so the opportunity cost of 2 computers is .5 leather jackets (1/2). Would Anything Happen To The Opportunity Cost Of Television Sets? The opportunity cost of producing 60 Umies instead of 30 Umies is: A. I. Sunk costs are those that cannot be recovered, no matter what future action is taken. b. Business Strategy. The problem comes up when you never look at what else you could do with your money or buy things without considering the lost opportunities. I also spent $300 on extremely stylish gym clothes. Which of the following was relevant to this decision? It is important to note that the implicit costs are the benefit of the next best option. 20 Ums. 1.1 What Is Economics, and Why Is It Important? b) I and III only. What is a simple definition of opportunity cost? D. 40 Ums. Unattainable. The opportunity cost of something is whatmust be given up to acquire it. the necessary 1/100 worker-years in America would mean (1/100 * 20) = 0.2 fewer computers produced. Opportunity costs are truly everywhere, and they occur with every decision we make, whether it’s big or small. The marginal cost of completing the costume is A) $20. He has agreed to pay 10% interest on the loan. If, for example, they had instead invested half of their money in the stock market and received an average blended return of 5.00%, then their retirement portfolio would have been worth over $1 million. Opportunity cost only measures direct monetary costs. d) I and III only. Assume that, given a set amount of money for investment, a business must choose between investing funds in securities or using it to purchase new equipment. B) the inverse of the opportunity cost of one more bolt of cloth. Opportunity cost is a term economists use to describe the relationship between what an item adds to your life, and how much it might cost you by not having it, taking into account your other options. Assuming that it is impossible to resell the Lady Gaga ticket, what is the minimum value you would have to place on a night at the opera, in order for you to choose the opera over Lady Gaga? The opportunity cost of choosing this option is then 12% rather than the expected 2%. Have you ever convinced yourself to get out of bed by reminding yourself that you paid $60 for your monthly gym membership? D) Unable to determine without knowing input costs. When making big decisions like buying a home or starting a business, you will probably scrupulously research the pros and cons of your financial decision, but most day-to-day choices aren't made with a full understanding of the potential opportunity costs. After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost. You were willing to pay up to $350 for this ticket, but it only cost you $100. So we can add up the individual MC comps for each of these rows and we get 15 (1+2+3+4+5). a. This preview shows page 16 - 26 out of 30 pages. Practice Questions to accompany Mankiw & Taylor: Economics 9 d. Why is her production possibilities frontier a straight line instead of bowed out like those presented in Chapter 2? Opportunity cost is the value of something when a particular course of action is chosen. In a typical month I spend about $50 on beer at the Club. Given this, what do my monthly SUNK COSTS equal? 3. c) III only. In the long run, however, opportunity costs can have a very substantial effect on the outcomes achieved by individuals or companies.