Sept. 11 2013
Opportunity Cost Continued
1. Benefit of attending university for one year.
Individual A: $275,000
2. If opportunity cost increases from %15,000 (Sept.2012) to
$45,000(Sept.2013), individual will choose NOT to attend university.
1) Opportunity cost is the SAME for A,B, and C.
2) Because of individuals like C, enrollment declined in Sept.2013.
Measuring Opportunity cost
Direct Costs (each dollar spent has opportunity cost of one dollar
Next best alternatives
Dollar amount or value assigned by you
Rational Decision Making
Undertake activity if Marginal (Additional) benefit exceeds marginal
1. Include all opportunity costs
2. Ignore sunk costs
Sunk Costs (“Fixed Costs”)
Costs which are incurred whether or not action is taken Insight
Only relevant costs are those which can be avoided if action is not taken
1. Marginal benefit of attending sports event:
$100 (Both Jack and Jill)
2. Ticket Price:
1. Jack buys one week in advance
2. Jill plans to buy on day of event
3. Subway breaks ddown on day of event, and Jack and Jill both face
unexpected cost : $75 for taxis
4. Should Jack attend event?
Should Jill attent event?
Jack Should attend
MB = 100 MC = 75 MB>MC
[ticket price is sunk cost]
Jill Should Not attend
MB = 100 MC = 75 + 50 = 125
MBMC, so repair the truck
Profit: $6,000 – ($5,000 + $3,000) = -$2,000
If do not repair truck, Profit: $0 - $3,000 = -$3,000 Ex: Restaurant should it stay open for lunch?
Lease payment: $12,000 per month -> $400 per day