3. Not at all. Which of the following statements about opportunity costs is TRUE? School John C Birdlebough High School; Course Title ECO 104; Uploaded By jordancole241999. 15. An important part of being a rational decision maker is considering opportunity costs. The $3,000 difference is the opportunity cost of choosing company A over company B. Simply put, the opportunity cost is what you must forgo in order to get something. First Year $250 (half of $500) x 20% = $50 expense claim. Present value is the concept that states an amount of money today is worth more than that same amount in the future. (Click To Select) $ C. Between Which Two Consecutive Points Along The PPC Is The Opportunity Cost Of DVDs The Highest? 0 Computers. 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? Well in this case, it might be a bad idea. After new information, they learn of another, richer mine site that they can mine for $4 million, with projected revenues of $8 million. This makes it easy to put a dollar amount on your time. 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. You are only willing to pay $100, and your opportunity costs are $125 so no! B. B) 10 apples. Overview: Opportunity Cost : Type: Decision Making. This shows us something interesting. An explicit cost represents a clear direct payment of cash (whether actual cash or from debit, credit, etc). 2 ... computers. As economists, we want to measure the happiness you will get from this experience by finding your maximum willingness to pay. Because sunk costs cannot be recovered, they are irrelevant for future decision-making. On the day of the concert, a friend offers you a free ticket to the opera instead. They could be updated for an additional $1,200 and sold. Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which offer the potential for investment income. Therefore the relevant opportunity cost is 0.2 computers. As an investor that has already sunk money into investments, you might find another investment that promises greater returns. 22. the necessary 1/100 worker-years in America would mean (1/100 * 20) = 0.2 fewer computers produced. Some would argue that opportunity cost is not a “real” cost because it does not show up directly on a company’s financial statements. 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). Abilities vs Abilities The opportunity cost of after school violin lessons at a particular school is the ability to join other after school activities such as baseball or the chess club. Also, the total opportunity cost of producing 5 computers, is equal to the individual opportunity cost (or marginal costs) added up. d) All of the above were relevant. III. The opportunity cost of choosing this option is 10% - 0%, or 10%. For 5 hours of clubbing, you are forgoing the opportunity to earn $75 ($15 * 5). c) III only. If that was the case you would need to find a way to increase your willingness to go to the gym, for example, if you committed to a work out plan with a friend, the social cost of sleeping in may be high, incentivizing you to get out of bed. Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. But the opportunity cost instead asks where could have that $10,000 been put to use in a better way. Second Year $450 x 20% = $90 expense claim. 0.71 cups of ice cream. How to Calculate Present Value, and Why Investors Need to Know It. But what about our time? 4.The opportunity cost of moving from f to c is… 3.The opportunity cost of moving from d to b is… 7 Bikes. Due to scarcity, choices must be made. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. Ever heard the expression “we’ve invested too much in this project to back out now?” Even if you have not, it sounds fairly logical – unfortunately it is not. Thus, while 1,000 shares in company A might eventually sell for $12 a share, netting a profit of $2,000, during the same period, company B increased in value from $10 a share to $15. Given the production possibility curve, the opportunity cost of reading 2 more articles when you are already reading 11 articles is on average: A. Assume you also work as a server at the campus pub, where you get paid $15 an hour (including tips). In other words, by investing in the business, you would forgo the opportunity to earn a higher return. See the answer. The opportunity cost of the new product design is increased cost and inability to compete on price. d) I and III only. However, buying one cheeseburger every day for the next 25 years could lead to several missed opportunities. Classical economists will often assume that utilities can be measured as a hard number. In reality, it is must harder to measure the happiness a consumer  receives from a good. The opportunity cost of your golf game is: 7. Tickets cost $100, and the next-best alternative use of your time would be to work in paid employment earning $50 over the evening. For example, if option A could earn you $100, and option B could earn you $80, then option B has an opportunity cost of $20 because $100 minus $80 is $20. Does this mean you should never go out? If Hi-Tech updates the computers and sells them, net income will increase by $4,500. 3) Jane produces only corn, measured in tons, and cloth, measured in bolts. In economics, risk describes the possibility that an investment's actual and projected returns are different and that the investor loses some or all of the principal. As decision makers, we have to make trade-offs on what we do with finite resources. 2. The opportunity cost of the new design of the product will be the increased cost and its inability to compete on price. The opportunity cost of seeing the movie is equal to: 5. As a member of UVic’s University Club, I pay $30 per month in membership fees. Opportunity cost only measures direct monetary costs. A firm tries to weight the costs and benefits of issuing debt and stock, including both monetary and non-monetary considerations, in order to arrive at an optimal balance that minimizes opportunity costs. What is Angela's opportunity cost of 1 pot? 8. As such it should have no impact on future decision making. This morning, I was trying to decide whether or not to actually go to the gym. 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. 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. The opportunity cost of producing 60 Umies instead of 30 Umies is: A. With this willingness to pay reflected in the table, the better option is to Sleep-In, with an opportunity cost of $20. Opportunity cost is the value of what you lose when choosing between two or more options. Which of the following statements about sunk costs is FALSE? In other words, explicit opportunity costs are the out-of-pocket costs of a firm. It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency, and profits would remain stable. What is a simple definition of opportunity cost? The opportunity cost is the cost of the next best choice, or what we give up to get what we want. The key insight is that the costs we are referring to are opportunity costs, which consider the next best alternative use of our resources. While financial reports do not show opportunity costs, business owners often use the concept to make educated decisions when they have multiple options before them. Aside from the missed opportunity for better health, spending that $4.50 on a burger could add up to just over $52,000 in that time frame, assuming a very achievable 5% rate of return. Well, you fell victim to a common logical fallacy. If the selected securities decrease in value, the company could end up losing money rather than enjoying the expected 12 percent return. Opportunity cost is the value of something when a particular course of action is chosen. 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. Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. 13. The first image paints a compelling picture of the scarcity of time, and our financial resources are also scarce. The ‘willingness to pay’ represents how badly someone might want to go to the gym. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year as compared to revenues of $3,275,000 per year. If we took them all into account our costs would be infinite. What if your friends were to ask you if you want to go out to the club? 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