Opportunity Cost Practice Problems
A few examples of Opportunity Cost:
Whenever you decide to do something, you are probably giving up an opportunity to do something else (e.g. If
you go to school, you may not be able to work. If you grow corn, you may not be able to grow soy beans).
Opportunity cost is defined as the value of the best alternative that you forfeit by doing something else. For
instance, if you could work and earn $18,000 a year but you decide to go to school, your opportunity cost of
attending school is $18,000.
When opportunity cost is used in decision making, it is important to consider all costs and benefits. For
example, if a college professor could earn $55,000 a year teaching or $65,000 a year working in industry, his
opportunity cost of teaching is $65,000. Looking at only opportunity cost, it appears that the college professor
should leave teaching for industry, but this decision cannot be made without considering the non-monetary
benefits of teaching. Compared to industry, teaching has more job security, more leisure time, more challenges,
less stress, and less political structure - all of which increase the utility from teaching. In deciding whether to
teach or work in industry, the college professor should determine if his total benefits from teaching, monetary
and non-monetary, exceed his opportunity cost of teaching. The professor should leave teaching for industry
only if his opportunity costs of teaching exceed his total benefits of teaching.
1. The difference between a good and a service is that:
Choose an item.
2. The opportunity cost of an action:
Choose an item.
3. If you pay $5,000 a year in tuition and give up $20,000 a year of income to attend college, then the yearly
opportunity cost of college is:
Choose an item.
4. Describe some of the opportunity costs when you decide to do the following.
Choose an item.
5. Liza needs to buy a textbook for the next economics class. The price at the college bookstore is $65. One
online site offers it for $55 and another site, for $57. All prices include sales tax. The accompanying table
indicates the typical shipping and handling charges for the textbook ordered online.
Shipping method
Standard shipping
Second-day air
Next-day air
Delivery time
3–7 days
2 business days
1 business day
Charge
$3.99
$8.98
$13.98
a. What is the opportunity cost of buying online instead of at the bookstore? Note that if you buy the
book online, you must wait to get it.
b. Show the relevant choices for this student. What determines which of these options the student will
choose?
6. What is a likely candidate for the opportunity cost of raising corn?
Choose an item.
7. What is a likely candidate for the opportunity cost of selling insurance?
Choose an item.
8. If you have a job that pays $25,000 per year in your hometown of Lawton, Michigan and you are
offered a job in Denver, Colorado that pays $40,000, what is your opportunity cost of working in
Lawton?
Choose an item.
9. In reference to question 8, should you take the job? Why or why not?
10. In reference to question 9, if you decide not to take the job in Denver, Colorado, what is the
value of the benefits of working in Lawton, Michigan?
Choose an item.
11. An entrepreneur decides to end her career in the world of investment banking and start a new business
running a hotel in Cancun. Identify three potential opportunity costs arising from this decision:
A.
B.
C.
D.
12. List three factors that make it hard to assess the opportunity cost of a decision
A.
B.
C.
Directions: Use the concept of opportunity cost to explain the following behaviors. Note that only those
explanations that use the concept of opportunity cost meet the requirements of the directions for this
assignment!
13. Why would a student choose not to study for an exam even though she knows from past experience that she
performs better on exams when she has spent time studying?
14. Why would a teenager not ask to a dance the person he’d like to ask, even though he knows she does not
have another date?
15. Why would a hot dog vendor on a New York street corner lower the price of dogs late in the day?
16. Why do Americans today find themselves much more pressed for time than their great -grandparents were,
despite the fact that we have so many machines and appliances that save us labor and time?
17. Why would a poor family in a developing country choose to send a 10 year-old to work in a factory rather
than to school, even though they know that being able to read and write would offer the child better options
for the future?
18. Why do so many more inventions and innovations come from western countries where property rights are
secure than from developing and communist countries where they are not?
19. Why are people in some parts of the world willing to work for $1 per day and in the U.S. employers often
have trouble finding people willing to work minimum wage jobs?