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ECO100Y1 (438)

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Gustavo Indart

Quick OverviewOpportunity cost of taking an action what you forgo give up by not taking the next best alternativeThe question should I do Z should be replaced by Should I do X or Y where Y is the next best alternative to XIf the opportunity cost of taking an action is high you may choose not to take the action You decide to go out for dinner which costs 100 You value the dinner Example 1at 200 Your next best alternative is to attend a concert which you value at 75 The cost of a ticket to the concert is 50 What is the opportunity cost of going out to dinnera 25 b 50 c 75 d 125 e None of the aboveWhat is the opportunity cost if you value the dinner at 400a 25 b 50 c 75 d 125 e None of the aboveAnswerAction taken 100 direct cost Next best alternative75 monetary value50 direct cost125for both casesThe value you assign to the dinner does not affect its opportunity costRational Decision Making additional benefit exceeds marginal y Undertake activity if marginaladditional cost Insights 1 Include all opportunity costscosts 2 Ignore sunk Sunk CostsFixed Costs
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