2281 · 1.3
Practice and worked examples for 2281 Opportunity cost. Short previews only — attempt the full question in MarkScheme against the official scheme.
A student chooses to study economics for an hour instead of working a part-time job paying £8. What is the opportunity cost?
The £8 wage (or whatever could have been earned) — the next best alternative forgone.
If leisure was valued more than £8, the OC of studying might be that leisure.
A government has a budget of $50 million. It can build a new hospital wing for $48 million or a new road for $50 million. The hospital wing is expected to generate $60 million in social benefits. The new road is expected to generate $58 million in benefits. Which project is the rational choice, and what is its opportunity cost?
A rational government aims to maximise the net social benefit from its spending.
Step 1: Calculate the net benefit of each project. Net Benefit = Total Social Benefit − Project Cost
Step 2: Make the rational choice. The hospital wing provides a higher net benefit ($12 million) compared to the new road ($8 million). Therefore, the rational choice is to build the hospital wing.
Step 3: Identify the opportunity cost. By choosing the hospital wing, the government forgoes the next best alternative, which is the new road. The opportunity cost is the value of the benefit that this alternative would have provided.
Final Answer: The rational choice is to build the hospital wing. The opportunity cost is the $58 million in social benefits that would have been generated by the new road.