Suppose that it costs $5 to buy a coffee and takes 10 minutes of your time. In that time you could be working and earn $10, or spending time at the beach which you value at $5. What is the opportunity cost of the coffee?
Question
Suppose that it costs 10, or spending time at the beach which you value at $5. What is the opportunity cost of the coffee?
Solution
The opportunity cost of a decision is the value of the next best alternative that one gives up when making that decision. In this case, the opportunity cost of buying a coffee includes both the explicit cost of the coffee and the implicit cost of the time spent buying the coffee.
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The explicit cost is the actual out-of-pocket cost of the coffee, which is $5.
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The implicit cost is the value of the next best alternative use of your time. In this case, you have two alternatives: working or going to the beach.
- If you choose to work, you could earn $10.
- If you choose to go to the beach, you value this at $5.
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The higher valued alternative should be considered as the implicit cost. In this case, working is valued higher at $10.
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Therefore, the opportunity cost of the coffee is the sum of the explicit cost and the implicit cost, which is 10 (implicit cost of the time spent) = $15.
So, the opportunity cost of the coffee is $15.
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Opportunity cost
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