Opportunity cost — practice questions

Step 1 — Identify the alternatives: the hour could be spent studying or working. The next best alternative to studying is the hour of paid work.

Step 2 — State the opportunity cost: the $8 of wages forgone. That is the value of the next best alternative, so it is the opportunity cost.

Step 3 — Check what does not count: the cost of the textbook, the bus fare to the library or the hour itself are not the opportunity cost. Opportunity cost is always the alternative given up.

Step 4 — Interpret: if the student expects the hour of study to be worth more than $8 to them (better grades, a better job later), the choice is rational despite its cost.

Step 1 — Opportunity cost (a): the next best alternative forgone is the road, so the opportunity cost is the road and its benefit — roughly 10 000 commuter hours saved each week. (The $2 million left over could still be spent, but the road itself can no longer be built.)

Step 2 — Why not the money (b): $48 million is what the hospital wing costs, not what is given up. Opportunity cost is measured in the alternative use of the resources, and here the alternative use is the road.

Step 3 — Deciding (c): compare the benefits of each option against the other — for example, value the hours saved at an average wage and compare them with the value of treating 20 000 patients. This is a simple cost–benefit analysis. Governments also consider who gains (patients versus commuters), the long-run effects on productivity, and public opinion.

Step 4 — Evaluation: whichever option is chosen, the opportunity cost is real; a good decision is one whose benefits exceed the benefits of the next best alternative, not one with no cost.