Dear Donald: Beyonce, Adele, and Opportunity Cost
Executive Director, Donald Liu, is back to answer your burning economics questions. Do you have your own questions on economics or personal finance? Click on ‘Ask a Professor’ above and submit yours today – you may see it in a future post!
What’s the deal with opportunity cost? I’m so confused! You told us that “the opportunity cost of a choice is the value of the best alternative forgone”. But, on today’s quiz my answer of ‘$40’ as Amy’s opportunity cost of seeing “The Last Days On Mars” was marked wrong. How come?
The question I posed in class went like this: Amy is thinking about going to see “The Last Days On Mars” this evening. A ticket costs $10 and she will have to cancel her babysitting job that pays $40. What is the opportunity cost of seeing the movie this evening?
Indeed, by seeing the movie this evening, Amy will have to give up $40 from babysitting. But, she will also have to give up $10 by buying the ticket. Thus, the total amount of money Amy has to forgo in order to see the movie tonight is $50. (Of the $50, $40 is the opportunity cost of her time and $10 is the opportunity cost of her paying $10 for the ticket.) In other words, the opportunity cost of obtaining something is the total amount of money you have to give up in order to obtain that thing.
Let me pose another question to solidify your understanding of the concept. Suppose you won a free ticket to see an Adele concert this evening. You cannot resell it or give the ticket to other person (your name is on the ticket). Beyoncé is performing on the same night and her concert is the only other activity you are considering. A Beyoncé ticket costs $40, and you are willing to pay as much as $60 to see her perform. There is no other cost involved. What is your opportunity cost of going to Adele’s concert tonight?
The answer is $20. By going to Adele’s concert tonight, you’re giving up the opportunity of seeing Beyoncé. Since you are willing to pay up to $60 to see Beyoncé, $60 is the monetary value of the satisfaction you’re getting by seeing her tonight. By going to Adele’s concert, you are giving up that $60 satisfaction. However, you’re also saving $40 on the ticket. Thus, by going to Adele’s concert, the total amount of monetary value you have to give up is just $20.
I hope this helps.
Photo attribution: Adele by Beacon Radio (CC BY-NC 2.0) BEYONCE WORLD TOUR 2009 by Hassy’s (CC BY-NC-SA 2.0)