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Example of Subjectivity of OC

Example of Opportunity Cost

What is the opportunity cost of attending college full time this year? What is the best alternative you give up to attend college? Suppose you have a job that guarantees $24,000 a year, by subtracting your summer part-time earning of $7,000 in college, you know you are giving up net earnings of $24,000 - $7,000 = $17,000 for attending college this year. In addition, you are paying $ 6,000 for tuition, various fees and books, which is unavailable for you (or your family) to spend elsewhere. Thus the opportunity cost of paying for tuition, fees and books is the value of the goods and services that could have purchased with the money. To sum up, by choosing to attend college full time this year, your opportunity cost in money would be a total of $17,000 + $6,000 = $23, 000. However, time spent on lessons may well be over and above that spent on going a routine job, leaving less time for you to go to parties or hanging out with family and friends. So you see, opportunity cost does not solely talk about money, in fact, it is usually bigger than those tangible things that we have forgone in the form of money.

Opportunity cost is subjective. Only the chooser can determine the most attractive alternative for itself from its special point of view. We each has a different list of things valued in decline from top to bottom due to our different aims of life and philosophy. Even for the same activity or good or service, different individuals take it with different opportunity cost.

Example of Subjectivity of OC

I started building this website bearing the hope that it would one day become popular so that I could benefit from the commercial value. I made the decision to do this because I believe the other activities I could otherwise be involved in will generate less or no value for me in future as opposed to writing this crash course. Bill Gates, on the contrary, with much more serious and far more profitable business to do, he would have never seen any good in doing this. The opportunity cost he would have to undertake by spending his precious time on this is so huge that it is almost impossible for it to happen to a rational economic man like him.

Nevertheless, the chooser seldom knows the actual value of the second best alternative forgone, since focusing on only the expectedly best alternative makes all other possible alternatives irrelevant. In light of this, you will never know the exact value of what you let go if you give up an evening of pizza and conversation with friends to work on a term paper.

1.2.3. Marginal Analysis & Sunk Cost

A second key concept used in analyzing choices is the notion of marginalism. In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that is derived directly from, or contingent of the decision. See the example below.


Date: 2016-01-14; view: 707


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