opp o rtunity c o s t - montana council on economic … o rtunity c o s t: module-2. ... opportunity...

The value of The nexTBesT alTernaTive given up

OppOrtunity cOst:

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TEACHER’S GUIDEP. 35 DefinedP. 37 Content standardsP. 37 MaterialsP. 38 ProcedureP. 39 Lesson outlineP. 43 ClosureP. 44 AssessmentP. 47 OverheadsP. 61 2Answer key

VISUAlS NVisuals for overhead projector.Copy to transparent paper for overhead.

P. 48 NVisual-1: Opportunity cost definedP. 49 NVisual-2: Student opportunity costP. 50 NVisual-3: There is no free lunchP. 51 NVisual-4A: Opportunity cost of car ownershipP. 52 NVisual-4B: Opportunity cost of car ownershipP. 53 NVisual-5: SavingsP. 54 NVisual-6: Delayed savings

lESSonS 2Copy and handout to students.

P. 56 2Lesson-I: Vegan or meat eaterP. 57 2Lesson-III: What is your opportunity costP. 58 2Lesson-IV: Spending and savingP. 59 2Lesson assessment

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Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs 35

DEfInED

How 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 ChoiCEs36

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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.

ConCEpTS1. Opportunity cost

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2. Scarcity3. Trade off4. Explicit costs5. Implicit costs

objECTIVES1. Understand the meaning of opportunity cost.2. Know the difference between explicit costs and implicit costs.3. Understand that a trade off (choices) must be made.4. 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 REqUIRED1-3 class periods

mATERIAlS nEEDEDOverhead projector


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Transparency penVisuals for overhead projector: Copy to transparency.NVisual-1: Opportunity cost definedNVisual-2: Student opportunity costNVisual-3: There is no free lunchNVisual-4A: Opportunity cost of car ownershipNVisual-4B: Opportunity cost of car ownershipNVisual-5: SavingsNVisual-6: Delayed savingsLesson worksheets: Copy for each student.2Lesson-I: Vegan or meat eater2Lesson-III: What is your opportunity cost2Lesson-IV: Spending and saving2Lesson assessment

pRoCEDURE1. 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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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 carNVisual-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


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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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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 savingNVisual-5: SavingsNVisual-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,


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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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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?


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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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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. c2. c3. b4. c5. a

DISCUSSIon/ESSAy qUESTIonS1. 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. LQuestion: 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!


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NOTES

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Module-2Visual

The value of The nexT besT alTernaTive given up

Visual-1: OppOrtunity cOst defined

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Module-2Visual

Visual-2: student OppOrtunity cOst

Plans wiThexPecTed exaM

sTudenTnaMe

eVeningPlans

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Module-2Visual

Visual-3: there is nO free lunch

There is No free luNch

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Module-2Visual

$dOllar

expl

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sVisual-4a: OppOrtunity cOst Of car Ownership

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Module-2Visual

Visual-4B: OppOrtunity cOst Of car Ownership

OppOrtunity cOst

implic

it cO

sts

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Visual-5: saVings

1516171819202122232425262728293031323334353637383940506070

age

100010001000100010001000100010001000100010001000100010001000100010001000100010001000

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%

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

120,958197,028

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

interestearned

principle

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

tOtalsavings

interestrate

annualsavings

ToTal SavingS

206,879

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Visual-6: delayed saVings

353637383940414243444546474849505152535455565758596061626364656667686970

age

100010001000100010001000100010001000100010001000100010001000100010001000100010001000100010001000100010001000100010001000100010001000100010001000

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%

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

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

interestearned

principle

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

tOtalsavings

interestrate

annualsavings

ToTal SavingS

100,628

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Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs56 2

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Module-2lesson

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

lessOn-i: Vegan Or meat eater

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?

production possibilities frontier.

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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. 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)?

lessOn-iii: OppOrtunity cOst


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Module-2lesson

lessOn-iV: spending and saVing

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. 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?

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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.


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Module-2lesson

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?

lessOn assessment


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Module-2answer

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


opporTuniTy CosT



Module-2answer

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)

lESSon-III: AnSwER KEy


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Module-2answer

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.


opporTuniTy CosT



Module-2answer

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.

lESSon-IV: AnSwER KEy

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opp o rtunity c o s t - montana council on economic … o rtunity c o s t: module-2. ... opportunity...

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