Module-2
O pportunity cost :
The value of the next
Best alternative given up
TEACHER’S GUIDE
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P. 44
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Defined
Content standards
Materials
Procedure
Lesson outline
Closure
Assessment
Overheads
2Answer key
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
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P. 49
P. 50
P. 51
P. 52
P. 53
P. 54
NVisual-1: Opportunity cost defined
NVisual-2: Student opportunity cost
NVisual-3: There is no free lunch
NVisual-4A: Opportunity cost of car ownership
NVisual-4B: Opportunity cost of car ownership
NVisual-5: Savings
NVisual-6: Delayed savings
Lessons 2
Copy and handout to students.
P. 56
P. 57
P. 58
P. 59
2Lesson-I: Vegan or meat eater
2Lesson-III: What is your opportunity cost
2Lesson-IV: Spending and saving
2Lesson assessment
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
Defined
H
ow do you decide whether to dine in or out? How do your students
determine whether to study after school or hang out with their
friends? How does a firm decide whether to produce one good or
another? Each of these decisions depends on opportunity costs.
The opportunity cost of any action is the value of the next best
alternative that has to be given up. If you use your time tonight to stay
home for dinner, what have you missed by not going out? The opportunity
cost of staying home for dinner is the enjoyment of going out. What do
your students perceive to gain by studying tonight instead of socializing
with their friends? The opportunity cost of studying is socializing. If a firm
chooses to produce cookies rather than cinnamon rolls, the opportunity
cost of producing cookies is the production of cinnamon rolls.
The opportunity cost is the value of the most preferred alternative
action that is not chosen. It may change depending on what’s for dinner,
if an exam is expected the following class day, or if the value of cookies
(yes, cookies!) fall.
Generally, we must choose between a multitude of actions. The
opportunity cost of what we chose is the action we value the most but
did not take.
Turn, for a moment, to a decision to attend college. While attending
college your income will be lower because you will work less. One
important part of the opportunity cost of attending college is the income
you will give up while you are studying.
Once you have decided to go to college then you must decide
whether or not to go to any given class. The opportunity cost of daily
attendance is likely to change based on the alternative activities that are
available that day. For an avid skier, the opportunity cost of attending
class on a morning with a foot of fresh powder will likely be greater than
when it is raining at the ski hill. If the value of skiing is greater than the
value of going to class, the choice will be to go skiing. The opportunity
cost would then become the perceived value of the missed class.
Consider a different perspective of opportunity cost. What is the going
rate for a teenage babysitter? Are all babysitters willing to accept the same
wage? The wage of a babysitter who holds a retail sales job must be paid
higher than a babysitter who does not. Why? Babysitters must be paid at
least as much as their opportunity cost; that is, they must be paid at least
the value of their most preferred alternative opportunity.
There are two types of costs that contribute to any activity; explicit
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
35
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
costs and implicit costs. The explicit costs are the payments that we make
for goods and services out-of-pocket. These are the dollars we pay when
going to the theater; the money in the bank withdrawn to cover the
check we write for the groceries; or the funds used to payoff the credit
card we used to buy gasoline. Implicit costs are the opportunity cost of
using resources we already own. To go to the theater, grocery store, or
gas station takes time. In any time period going to one precludes going
to the other. Hence, it costs us time or resources other than money to do
these activities. When going to college, we forego income from work.
We also give up playing with our pets, going skiing, and other activities
in that time. If we baby sit from three p.m. to five p.m. we have chosen
not to do some other activity during that time.
Implicit costs also include the physical resources we own. I have a
garage that is full of stuff. It is full of so much stuff that my car will not fit
in the garage. By filling my garage with stuff, I have given up the ability
to park in the garage. It is an implicit cost that my garage is too full for
my car. There is no cash outlay, but it is a cost. When I choose to use
the resources that I own (other than money) for one activity, I forego
using them in another manner and incur an implicit cost.
Choices are made based on the information available at the time of
the decision. Choices are based on the value of the outcome the decision
maker expects to obtain for each action. If it rains when we have chosen
to play soccer or the movie we chose to see is terrible, the actual value
may be less than what was expected. We made our decision based on
what we expected to happen, not what actually happened. We may or
may not get what we expected.
It is important to understand that when we make any choice to do
one thing we also make a choice not to do other things. Regardless of
what you choose to do, you could have done something else. Scarcity
of time and other resources limits our ability to do everything. A trade
off must be made. And there is a cost from choosing one activity over
another. (This is what economists mean when they say, there is no such
thing as a free lunch.) If someone takes me to lunch, I give up doing
something else. The cost of an action can be measured by the perceived
value of the next best opportunity that is being given up.
Concepts
1. Opportunity cost
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
2.
3.
4.
5.
Scarcity
Trade off
Explicit costs
Implicit costs
Objectives
1.
2.
3.
4.
Understand the meaning of opportunity cost.
Know the difference between explicit costs and implicit costs.
Understand that a trade off (choices) must be made.
Realize that every action has a cost.
Content Standards
National Content Standards in Economics
1. (Standard-1) Productive resources are limited. Therefore, people
cannot have all the goods and services they want; as a result, they
must choose some things and give up others.
2. (Standard-2) Effective decision making requires comparing the
additional costs of alternatives with the additional benefits.
3. (Standard-12) Interest rates affect the allocation of scarce resources
between present and future uses.
Montana Social Studies Content (Standard-5)
1. (Benchmark-1) Identify and explain basic economic concepts.
2. (Benchmark-4) Describe how personal economic decisions affect
the lives of people.
3. (Benchmark-5) Explain how money is used by individuals and groups.
Time Required
1-3 class periods
Materials Needed
Overhead projector
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
37
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
Transparency pen
Visuals for overhead projector: Copy to transparency.
NVisual-1: Opportunity cost defined
NVisual-2: Student opportunity cost
NVisual-3: There is no free lunch
NVisual-4A: Opportunity cost of car ownership
NVisual-4B: Opportunity cost of car ownership
NVisual-5: Savings
NVisual-6: Delayed savings
Lesson worksheets: Copy for each student.
2Lesson-I: Vegan or meat eater
2Lesson-III: What is your opportunity cost
2Lesson-IV: Spending and saving
2Lesson assessment
Procedure
1. Explain to students that this Module will focus on opportunity cost.
By choosing to do one activity, other activities must be given up.
The opportunity cost of the chosen action is the value of the next
best alternative given up. Display NVisual-1: Opportunity cost
defined.
2. Discuss with students what they intend to do this evening. You
may want to do this systematically by row or column. Display
NVisual-2: Student opportunity cost. Reiterate that by choosing one
activity they are giving up another. Have the same students tell you
their opportunity cost for the listed activity. What is their next best
alternative? Write these in the column next to the first list. Now tell
the students you will be giving them an exam tomorrow that is worth
50 percent of their grade. Ask if this will change their evening plans.
In the third column list any change in plans for the same students
given tomorrow’s exam. Assuming more students have now decided
to take time to study, ask them why they changed their plans? The
perceived value of studying for your class has risen. Hence, the
opportunity cost of not studying this evening has also gone up. As
a result, more students are likely to choose studying over the other
activities they originally intended to do. Recall, our choices are
based on the expected value from activities given the information
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
available at the time the choice is made.
3. Display NVisual-3: There is no free lunch. Remind students that
each choice they make is also a choice to forego doing something
else. There is a cost to everything we do because we cannot do it
all at once.
Lesson outline
Lesson-I: Vegan or meat eater
Materials:
2Lesson-I: Vegan or meat eater
Have students pull out or, if collected, handout 2Lesson-II: Vegan or meat
eater from Module-1 and 2Lesson-I: Vegan or meat eater from this Module.
This relates to questions five and questions six.
LQuestion: Ask students what their opportunity cost was for producing
vegetables?
Answer: The opportunity cost is how many cows were given up to
produce more vegetables.
We tend to think of opportunity cost in single units, hence, how many
bushels of vegetables were given up to produce one more cow? Even
if they did not want to produce any vegetables, they forego producing
vegetables for cows. For each one cow produced, 50 bushels of
vegetables were not produced. The opportunity cost to produce one
more cow is 50 bushels of vegetables. The opportunity cost to produce
50 more bushels of vegetables is one cow or to produce only one more
bushel of vegetables will cost 1/50th of a cow.
Lesson-II: The cost of car ownership
Materials:
NVisual-4A: Opportunity cost of a car
NVisual-4B: Opportunity cost of a car
Ask your students how much it costs to own a car. The typical
response is the purchase price of a car. Next, students may think about
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
39
Opportunity Cost
Module-2
Teacher
The value of the next best
alternative given up
the cost of gasoline, insurance, routine maintenance, and repairs. These
are the explicit costs. Using NVisual-4A: Opportunity cost of a car,
write down the range of direct expenses under the dollar heading as
the class develops them.
The purchase price of the car, cost of gasoline, insurance,
maintenance and repairs, and any other direct expenses or outlays of
cash for car ownership.
Place NVisual-4B: Opportunity cost of a car on top of NVisual-4A:
Opportunity cost of a car. Discuss the opportunity cost for purchasing
a car.
LQuestion: Where else could the money have been spent?
Add these to the opportunity cost column to the right of the explicit
costs. (This is not a dollar value, rather a list of other places the money
could have been spent, including saving for future uses). List the future
uses as well.
LQuestion: What is the opportunity cost of maintaining the car in
working order. Again, what else could be purchased with the money?
LQuestion: Ask the students what they are going to do to raise the
money necessary to cover the dollar costs (some may have cars and
expenses gifted to them or have already saved, others are going to have
to earn the money)?
Explain that the cost of using our own resources, like time, are
implicit costs, there is no cash outlay but we give up doing something
else (If students are working they must forego time spent studying
and hanging out with their friends). Discuss the implicit costs of car
ownership and write them in the implicit costs column, be sure to
include time.
Students that are going to work to earn money need to recognize
the opportunity cost of their time. Discuss the opportunity cost of
spending time working. List these ideas under the opportunity cost
of time or implicit costs. Keep in mind, work and owning a car have
benefits too. Working teens gain valuable experience for the future.
Having a car may reduce the time spent getting places. Students may
get places faster by driving than having to walk or ride a bike. On the
other hand, they will miss out on the exercise, another implicit cost.
Add this to the list. Perhaps with a car of their own they don’t have to
live according to a parent’s schedule but they may now be required to
deliver or pick up a sibling.
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
Lesson-III: What is your opportunity cost?
Materials:
2Lesson-III: What is your opportunity cost?
Have students think about their opportunity cost with respect to
wages.
LQuestion: How much would students be willing to accept to go to work?
Would anyone in the class work for one or two dollars per hour?
LQuestion: Students will go to work when the wages are greater than
their opportunity cost which will change over time, and opportunity cost
is likely to be higher on prom night than the following Sunday night?
While different people have different opportunity costs, different jobs
also have different characteristics. For example, what wage is required to
clean toilets, baby sit, or wash the windows of a high rise building. The
wage will be different for different people based on their opportunity
cost and how they value the job and its potential risks.
Handout 2Lesson-III: What is your opportunity cost. In small groups
or individually, have students think about whether they would ride the
bus or fly to see a show (it depends on each individual’s opportunity
cost). Given a wage of six dollars per hour, an individual would be
better off taking the bus. The opportunity cost to fly would be the five
hour bus ride times six dollars per hour, $30, plus the $50 bus ticket, a
total of $80 which is still less than the $150 ticket to fly. An individual
would be willing to take the bus given a wage up to $25 per hour where
the opportunity cost to fly is $175 (five hours times $25 plus $50 ticket)
and equal to the cost of airfare.
Lesson-IV: Spending versus savings
Materials:
2Lesson-IV: Spending and saving
NVisual-5: Savings
NVisual-6: Delayed savings
Decisions to spend and save are based on the expected value of
money at present compared to the future. If it is perceived that the
benefits of saving for the future are greater than the benefits gained
from spending today, people will save. The opportunity cost is less
consumption today. Spending today provides immediate benefits,
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
41
Opportunity Cost
Module-2
Teacher
The value of the next best
alternative given up
while saving for the future is less certain. Saving has a cost today but
future benefits. As a result, many people weigh the benefits of current
spending more than the benefits of saving for the future. Because value
is subjective, everyone values things differently, some people will save
while others will spend under a given set of circumstances.
Discuss with students the idea of saving, or setting money aside
for future use. Some students may be saving money to purchase an
expensive item in the future. This may include anything from a set of
Yugio cards for the younger set to skateboards and bicycles, a car, or
a college education. Remind them that the opportunity cost of saving
is foregoing consumption today.
In addition to the benefits of having more money for future
consumption, parents and banks may provide incentives to save. A
parent that offers to match a child’s annual savings has raised the
opportunity cost of current consumption. The value of saving is now
greater than it previously was. Similarly, interest provided by the bank
will add value to saving, increasing the opportunity cost of consumption
today. Interest is the payment from a financial institution for allowing
them to hold (and loan) your saved money.
Using NVisual-5: Savings. Show the students that if they start saving
$1000 a year at age 15 for the next 21 years at five percent interest
they will have $206,879 if they retire at age 70. Explain that interest
is the money paid to them for saving in a financial institution. The
sooner they invest, the sooner they can start earning interest on their
interest (compounding interest). By starting to save today, their money
can earn interest, and the interest can earn interest, for a longer period
of time. Advise them that if they wait to start saving until they are 35
and then begin to save $1000 a year until they are 70 they will only
have $100,628. This is shown on NVisual-6: Delayed savings. This is
only half of what they would have had if they started saving earlier
even though they saved, or gave up consumption, on an additional
$15,000.
LQuestion: Ask students to raise their hand if they knew
that starting to save now could help their financial situation in
the future and through retirement. Have them keep their hands
up if they have a trust fund retirement account, or are saving for
college.
LQuestion: Ask how many of them have invested their own money
in a retirement account? Have them keep their hands up if they have a
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
savings account. Most students know that saving now will help them
in the future, yet few of them are saving.
LQuestion: Ask how many of them have invested their own money
in a trust fund for retirement or college.
Money is scarce for most middle school and high school students.
Saving today would leave them little money for current consumption.
The benefit of consuming today, the opportunity cost of saving, is high.
In addition the benefits from saving are not guaranteed. Some people
die prematurely from accidents and disease and will, therefore, never
realize the benefits of retirement saving.
Handout 2Lesson-IV: Spending and saving. Have students answer
the questions individually or in small groups of two or three.
You may wish to incorporate some of the Lessons from MCEE’s
Learning, Earning, and Investing to carry the financial part of this
analysis further.
Closure
Lesson review
1. LQuestion: What is opportunity cost?
Answer: The value of the best alternative given up.
2. Display NVisual-1: Opportunity cost defined and review the
definition of opportunity cost.
3. Show NVisual-3: There is no free lunch.
LQuestion: Why is there no free lunch?
Answer: There is no free lunch because there is always an
opportunity cost.
4. LQuestion: How does opportunity cost affect the decision
you make?
Answer: To do anything you must forego doing something
else. Regardless of the financial expenditure there is always an
opportunity cost.
5. LQuestion: How many students are willing to buy a car today?
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
43
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
LQuestion: Why not all? Recall, the opportunity cost to buy a car
includes not only the financial resources but also the time to obtain
the financial resources. The value of the car will be higher than its
opportunity cost for some students but not all.
6. LQuestion: Is there an opportunity cost to every activity?
Answer: Yes. To do anything you must give up doing something else.
Assessment
Multiple-choice questions
1. LQuestion: What is opportunity cost?
a.Money paid for opportunity.
b.Irrelevant for choices people make.
c.The highest valued alternative given up when a choice is made.
d.The interest earned on investment.
2. LQuestion: What is your opportunity cost of going skiing?
a.The purchase price of a lift ticket.
b.The amount of money spent on food and drinks in the lodge.
c.The value of your next highest alternative given up because of
the time and money spent on skiing.
d.There is none, skiing is not a commodity.
3. LQuestion: What does an economist mean when saying “there is
no such thing as a free lunch?”
a.Somebody always has to pay for lunch, even if it is free to
you.
b.Even if somebody else buys your lunch, there is an opportunity
cost for your time.
c.This statement is incorrect. If somebody else buys your lunch it
is free to you.
d.Resources are used to make any lunch. What is free to you will
cost somebody else.
4. LQuestion: The total cost of an action includes:
a.Only explicit costs.
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
b.Only implicit costs.
c.Explicit costs and the opportunity cost of owned resources.
d.Costs paid with cash or debit from a bank account.
5. LQuestion: What is the opportunity cost of saving $10 in your
piggy bank?
a.The next best way in which you would have spent the money.
b.$10. There is no interest earned.
c.$10 plus any interest earned.
d.The cost of the piggy bank.
Answers:
1.
2.
3.
4.
5.
c
c
b
c
a
Discussion/Essay Questions
1. LQuestion: When Janey visited her sister in Washington, D.C. she
said, “I love visiting the Smithsonian because it does not cost me
anything.” Given that the Smithsonian does not charge an entrance
fee, is Janey’s statement correct economically speaking? Explain.
Answer: No. Janey still has an opportunity cost for her time.
2. L Question: What is the opportunity cost of answering this
question?
Answer: The opportunity cost is the next best alternative given up.
The opportunity cost of answering this question is what you would
be doing instead. I would be prepping for class. Even though I’d
rather be fishing!
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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Opportunity Cost
The value of the next best
Module-2
Teacher
alternative given up
NOTES
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Module-2
O ve r h e a d
visuals
Opportunity cost
Opportunity Cost
Module-2
Visual
The value of the next best
Visual-1: Opportunity cost defined
The value of the next best alternative given up
N48
alternative given up
Opportunity Cost
The value of the next best
Module-2
Visual
alternative given up
Visual-2: student Opportunity cost
Student
Name
Evening
Plans
Opportunity
Cost
Plans with
Expected Exam
N49
Opportunity Cost
Module-2
Visual
The value of the next best
alternative given up
Visual-3: there IS No free lunch
There is No free lunch
N50
Opportunity Cost
The value of the next best
Module-2
Visual
alternative given up
Visual-4A: Opportunity cost of car ownership
Explicit Costs
$Dollar
N51
Opportunity Cost
The value of the next best
Module-2
Visual
alternative given up
Visual-4B: Opportunity cost of car ownership
Implicit Costs
Opportunity cost
N52
Opportunity Cost
The value of the next best
Module-2
Visual
alternative given up
Visual-5: savings
Age
Annual
Savings
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
50
60
70
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
Interest
Rate
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Principle
1,000
2,050
3,153
4,310
5,526
6,802
8,142
9,549
11,027
12,578
14,207
15,917
17,713
19,599
21,579
23,657
25,840
28,132
30,539
33,066
35,719
37,505
39,380
41,349
43,417
45,588
74,258
120,958
197,028
Interest
Earned
50
103
158
216
276
340
407
477
551
629
710
796
886
980
1,079
1,183
1,292
1,407
1,527
1,653
1,786
1,875
1,969
2,067
2,171
2,279
3,713
6,048
9,851
Total
Savings
1,050
2,153
3,310
4,526
5,802
7,142
8,549
10,027
11,578
13,207
14,917
16,713
18,599
20,579
22,657
24,840
27,132
29,539
32,066
34,719
37,505
39,380
41,349
43,417
45,588
47,867
77,971
127,006
Total Savings
206,879
N53
Opportunity Cost
The value of the next best
Module-2
Visual
alternative given up
Visual-6: Delayed savings
N54
Age
Annual
Savings
Interest
Rate
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Principle
1,000
2,050
3,153
4,310
5,526
6,802
8,142
9,549
11,027
12,578
14,207
15,917
17,713
19,599
21,579
23,657
25,840
28,132
30,539
33,066
35,719
38,505
41,430
44,502
47,727
51,113
54,669
58,403
62,323
66,439
70,761
75,299
80,064
85,067
90,320
95,836
Interest
Earned
Total
Savings
50
103
158
216
276
340
407
477
551
629
710
796
886
980
1,079
1,183
1,292
1,407
1,527
1,653
1,786
1,925
2,072
2,225
2,386
2,556
2,733
2,920
3,116
3,322
3,538
3,765
4,003
4,253
4,516
4,792
1,050
2,153
3,310
4,526
5,802
7,142
8,549
10,027
11,578
13,207
14,917
16,713
18,599
20,579
22,657
24,840
27,132
29,539
32,066
34,719
37,505
40,430
43,502
46,727
50,113
53,669
57,403
61,323
65,439
69,761
74,299
79,064
84,067
89,320
94,836
100,628
Total Savings
100,628
Module-2
L e ss o n
w orksh e e ts
Opportunity cost
Opportunity Cost
The value of the next best
Module-2
Lesson
alternative given up
Lesson-I: Vegan or meat eater
Vegan or meat eater: What
Will You Grow on Your Farm
I
magine you own ten acres of
productive land. You can grow
vegetables on your land, you can
raise cattle, or you can grow some
vegetables and some cattle. These
are the only choices available to
you. You want to produce as much
as possible.
Assume you can grow 50 bushels
of vegetables per acre or one cow
per acre. This is given and will not
change through the exercise. Because
resources are scare—land, time,
and other inputs—you must give up
producing some of one thing to grow
more of the other.
On your ten acre plot you can
grow up to 500 bushels of vegetables
(50 bushels per acre times ten acres)
or raise as many as ten cows (one
cow per acre times ten acres). You
cannot, however, grow 500 bushels of
vegetables and ten cows. Remember
scarcity. If you start by producing ten
cows, you must give up some cows
to produce more vegetables. Another
way to think about this is shown in the
production possibilities frontier.
Questions:
1. LQuestion: What is the opportunity cost to produce one more cow?
2. LQuestion: What is the opportunity cost to produce one more bushel of
vegetables?
56 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Lesson
alternative given up
Lesson-III: Opportunity cost
What is your opportunity cost?
Y
ou have a ticket to see your favorite musician in concert. You need to decide
whether you will take an airplane or the bus to the show. You must pay for
the transportation yourself. The bus trip will take you five hours. It will only
take one hour if you fly. Assume the airfare is $150 and the bus fare is $50.
Questions:
1. Will you choose to fly or go by bus?
2. Assume nothing else changes; the rest of the world is standing still. If you
could earn six dollars per hour when not on the bus or airplane, which
mode of transportation would be cheaper?
3. What is the highest hourly wage rate you can make and still be willing to
take the bus (assuming you are not afraid to fly)?
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
57
Opportunity Cost
The value of the next best
Module-2
Lesson
alternative given up
Lesson-IV: Spending and saving
Spending and saving
D
ecisions to spend and save are based on the expected value of money at
present compared to the future. Because value is subjective, everyone
values things differently, some people will save while others will spend under
a given set of circumstances.
Questions:
1. If you receive a ten dollar
weekly allowance for ten
weeks with no interest
and you save it all, how
much will you have saved
over the ten week period,
assuming you have no other
income?
2. What are the benefits of saving?
3. When do you receive those benefits?
4. What are the costs of saving?
5. When do you pay those costs?
6. Why do people put off saving when they’re young?
7. How does this relate to opportunity cost?
8. Assume a parent offers to match any money you save over the next ten
weeks (referring to question one). How will this affect the opportunity cost
for spending and saving?
58 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Lesson
alternative given up
Lesson Assessment
Multiple-choice questions
1. LQuestion: What is opportunity cost?
a. Money paid for opportunity.
b. Irrelevant for choices people make.
c. The highest valued alternative given up when a choice is made.
d. The interest earned on investment.
2. LQuestion: What is your opportunity cost of going skiing?
a. The purchase price of a lift ticket.
b. The amount of money spent on food and drinks in the lodge.
c. The value of your next highest alternative given up because of the time
and money spent on skiing.
d. There is none, skiing is not a commodity.
3. LQuestion: What does an economist mean when saying “there is no such
thing as a free lunch?”
a. Somebody always has to pay for lunch, even if it is free to you.
b. Even if somebody else buys your lunch, there is an opportunity cost
for your time.
c. This statement is incorrect. If somebody else buys your lunch it is free
to you.
d. Resources are used to make any lunch. What is free to you will cost
somebody else.
4. LQuestion: The total cost of an action includes:
a. Only explicit costs.
b. Only implicit costs.
c. Explicit costs and the opportunity cost of owned resources.
d. Costs paid with cash or debit from a bank account.
5. LQuestion: What is the opportunity cost of saving $10 in your piggy
bank?
a. The next best way in which you would have spent the money.
b. $10. There is no interest earned.
c. $10 plus any interest earned.
d. The cost of the piggy bank.
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
59
Opportunity Cost
The value of the next best
Module-2
Lesson
alternative given up
Lesson Assessment
Discussion/essay questions
1. LQuestion: When Janey visited her sister in Washington, D.C. she said, “I
love visiting the Smithsonian because it does not cost me anything.” Given
that the Smithsonian does not charge an entrance fee, is Janey’s statement
correct economically speaking? Explain.
2. LQuestion: What is the opportunity cost of answering this question?
60 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Answer
alternative given up
Lesson-I: Answer Key
Vegan or meat eater: What will you grow on your farm?
Imagine you own ten acres of productive land. You can grow vegetables
on your land, you can raise cattle, or you can grow some vegetables and some
cattle. These are the only choices available to you. You want to produce as
much as possible.
Assume you can grow 50 bushels of vegetables per acre or one cow per acre.
This is given and will not change through the exercise. Because resources are
scare—land, time, and other inputs—you must give up producing some of one
thing to grow more of the other.
On your ten acre plot you can grow up to 500 bushels of vegetables (50
bushels per acre times ten acres) or raise as many as ten cows (one cow per
acre times ten acres). You cannot, however, grow 500 bushels of vegetables
and ten cows. Remember scarcity. If you start by producing ten cows, you must
give up some cows to produce more vegetables. Another way to think about
this is shown in the production possibilities frontier.
Questions:
1. LQuestion: What is the opportunity cost to produce one more cow?
Answer: 50 bushels of vegetables
2. LQuestion: What is the opportunity cost to produce one more bushel of
vegetables?
Answer: 1/50th of a cow
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
261
Opportunity Cost
The value of the next best
Module-2
Answer
alternative given up
Lesson-III: Answer Key
What is your opportunity cost?
You have a ticket to see your favorite musician in concert. You need to decide
whether you will take an airplane or the bus to the show. You must pay for the
transportation yourself. The bus trip will take you five hours. It will only take
one hour if you fly. Assume the airfare is $150 and the bus fare is $50.
Questions:
1. LQuestion: Will you choose to fly or go by bus?
Answer: It depends upon your opportunity cost or the value of your time.
2. LQuestion: Assume nothing else changes; the rest of the world is standing
still. If you could earn six dollars per hour when not on the bus or airplane,
which mode of transportation would be cheaper?
Answer: The opportunity cost to fly is the expected cost of the five hour
bus ride (five hours x six dollars per hour = $30) plus the $50 bus fare, or
$80 ($50 + $30).
$80 is less than $150 to fly + six dollars for the one hour flight. You are better
off taking the bus given a six dollar wage (six dollar per hour opportunity
cost of your time).
3. LQuestion: What is the highest hourly wage rate you can make and still be
willing to take the bus (assuming you are not afraid to fly)?
Answer: Let X = your hourly wage.
The opportunity cost to fly is the five hour bus ride times X, plus the $50 bus
fare:
5X + 50
The Opportunity cost to take the bus is the expected wage for the one hour
flight plus the $150 airfare:
X + 150.
You would be willing to take the bus until the opportunity cost to fly is
greater:
5X + 50 >150 + X
Reduce to: 4X > 100
Then: X = 25
You would be willing to take the bus up to a wage of $25 (all else constant)
62 2
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Opportunity Cost
The value of the next best
Module-2
Answer
alternative given up
Lesson-IV: Answer Key
Spending and saving
Decisions to spend and save are based on the expected value of money at
present compared to the future. Because value is subjective, everyone values
things differently, some people will save while others will spend under a given
set of circumstances.
Questions:
1. LQuestion: If you receive a ten dollars weekly allowance for ten weeks
with no interest and you save it all, how much will you have saved over
the ten week period, assuming you have no other income?
Answer: If no interest is earned, the savings will be ten dollars times the
ten weeks = $100
2. LQuestion: What are the benefits of saving?
Answer: The benefit of saving is having the $100 in the future for
consumption. Saving also provides security for the future.
3. LQuestion: When do you receive those benefits?
Answer: The benefits of saving occur in the future.
4. LQuestion: What are the costs of saving?
Answer: The cost of saving is giving up consumption today.
5. LQuestion: When do you pay those costs?
Answer: The cost of saving is paid today.
6. LQuestion: Why do people put off saving when they’re young?
Answer: Many people put off saving because they don’t have much
money.
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
263
Opportunity Cost
Module-2
Answer
The value of the next best
alternative given up
Lesson-IV: Answer Key
Spending and saving
7. LQuestion: How does this relate to opportunity cost?
Answer: Because young people usually don’t have much money, their
opportunity cost of saving, the reduction of consumption possibilities today,
is high.
8. LQuestion: Assume a parent offers to match any money you save over
the next ten weeks (referring to question one). How will this affect the
opportunity cost for spending and saving?
Answer: If interest or dollars matched to savings were added to this story,
the opportunity cost of spending today would go up.
NOTES
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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