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# opportunity costs PowerPoint PPT Presentation

1.You bought a ticket for \$50 to a concert. You value your time at \$10/hour. The concert is expected to last 2 hours. As you are walking into the arena someone offers you \$75 for your ticket. What is the opportunity cost of attending the concert ? \$20 time cost + \$75=\$95.

opportunity costs

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1.You bought a ticket for \$50 to a concert. You value your time at \$10/hour. The concert is expected to last 2 hours. As you are walking into the arena someone offers you \$75 for your ticket. What is the opportunity cost of attending the concert ?

\$20 time cost + \$75=\$95

2.You like to play golf. Greens' fees are \$20 and it takes approximately 4 hours to play. You value your time at \$10/hour. What is the opportunity cost of playing a round of golf?

• (4 x \$10) time costs + \$20 green fees = \$60.

3.You like to play golf. On January 1 you buy an annual membership for \$500 to the local country club. You expect to play 25 rounds of golf during the year, so the average cost per round is \$500/25=\$20. You value your time at \$10/hour and it takes approximately 4 hour to play. What is the opportunity cost of playing a round of golf?

• \$40, only time costs matter, the annual membership is a sunk cost.

4.You like to play golf. On January 1 you buy an annual membership for \$500 to the local country club. On December 31 you realize that your busy schedule kept you from playing even a single round of golf the past year. You value your time at \$10/hour and it takes approximately 4 hour to play. You decide to play a New Year's Eve round of golf. What is the opportunity cost of playing a round of golf?

• \$40

5.You've already spent \$500 fixing your car and it still won't run. To get it to run you will have to pay \$1000 more. What is the opportunity cost of getting your car to run?

• \$1000, the \$500 is a sunk cost

• You’ve spent \$500 on car repairs and your car still won’t run. A mechanic guarantees that he can get the car to run for \$1000. If your car is running, a used car auctioneer will give you \$1250 for your car. Should you spend the \$1000 fixing your car?

• Yes, you gain \$1250. If you hadn’t spent the extra \$1000 you will lose \$500. If you spend \$1500 and can sell the car for \$1250 you will only lose \$250.

6.You go to a 2 ½ hour movie. You value your time at \$10/hour. Movie tickets are non-refundable and cost \$6.50. After ½ hour you decide you hate the movie. What is the opportunity cost of watching the remainder of the movie in hope that it will get better?

• \$20. The \$6.50 is a sunk cost, and the half hour you have already spent is a sunk cost.

7.You start your own business. In order to do so, you quit your \$25,000/ year job. You also take \$100,000 out of your savings account to buy a building and fixtures. Even if you go out of business, you can sell your building for \$100,000. You were earning 6% on your savings account. What is the annual opportunity cost of starting your own business?

• \$25000 + 6% x \$100000 = \$31,000

• (the \$100,000 is not part of the cost because you have just traded one asset for another.

• You are going to Padre Island, TX for spring break with 4 friends. Driving takes 20 hours with gas and wear and tear costing \$50. Flying takes 2 hours and costs \$410. What is the value you have to place on your time to make you indifferent between the two modes of transportation?

• Cost of driving = cost of flying

• 20 hrs x value of time + \$50 = 2 hrs x value of time + \$410

• Value of time=360/18=\$20