brian has been trying to decide whether he should go to his grandpas for spring break,or go to jamaica with his friends. He values visiting his grandpa at $400 and he values going to jamaica at $3500. The price to visit his grandpa is $100, and the price to go to jamaica is $1200. What is Sean’s opportunity cost of going to jamaica?
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I feel like 300 bucks is way to simple of an answer to be correct...the 400 dollar "value" he passed up visiting his grandpa minus the 100 real dollars it would have cost
I think
$2600 .
well going to jamaica is actually the "best" option here since value minus cost = $2,300 surplus vs. value minus cost of grandpa trip is $300...
Since the opportunity cost of anything is the cost of passing up the next best choice, wouldn't that just be $300 plus the guilt? ...assuming there was nothing greater than $300 as another option...
poor grandpa.
Pretty sure you have to include the $1200 you would save by going to granpas. But hey, Patrick you are the boss here..
hmmm, not sure...kind of depends on the strict definition of opportunity cost. The way I think about your "cost" here (next best use of your time) is not being able to go see grandpa if you go to Jamaica, so you'd lose the net $300 surplus.
Anyone smarter than me want to confirm this?
got 300 also
Its $300. I hope I get questions this easy next time I interview.
i would have thought it was 1500 because you FORGO:
otherwise, i've forgotten first year micro :(
Patrick is right. Opportunity cost only relates to the benefit you are giving up, not the cost you are saving.
Double post
Econ 101 taught me that opp cost = the highest forgone alternative, so I'm definately going with 300...which also happens to be a great movie.
agree with everyone that it's $300 because of the way opportunity cost was presented on the first day of intro to econ - it was specifically distinguished from the actual cost of doing what you're doing
Eh, I'd have said he lost a lot more than $300. Brian's grandpa is rich and when he found out that Brian skipped spending time with him to go to Jamaica he took back the trust fund!
Good answer.
If this is the exact question, there are two different names, brian then sean. Sean's OC (as the question asks) is the interest he could collect on the $1200 he paid for going on the trip or whatever else he could have done with that money. OC is the value foregone by making the decison to visit Jamaica. The OC is the interest he could collect on the $1100 he didn't spend by visiting his grandpa. The intrinsic value derived (value he places on each visit minus the actual cost) is meaningless since he derived the max value, ie. he is not giving up any intrinsic value to visit Jamaica (there is no opportunity cost in receiving $2300 of intrinsic value vs. $300)
I'm sorry, do you mind me asking where did he interview? I'm just curious, is this type of questions asked at interviews for IB?
I get $300 as well. He is foregoing the $300 he would receive (in terms of value) if he went to see his grandpa.
Why are so many people so stupid when it comes to opportunity cost? Honestly, guys. Have some of you lost your minds? The opportunity cost is what you give up by NOT DOING the next best thing. Since you ARE DOING the Jamaica trip, opportunity cost has nothing to do whatsoever with Jamaica. What you "give up" by not going to Grandpa's is a net benefit of $300. This is so easy it almost makes me want to cry.
If this was actually a trick question, and Sean doesn't have a grandpa, so we don't know his opportunity cost, then the correct response would be to tell the interviewer to blow it out his ass.
yeah, 300. the 1200 saved is not "passed up" because brian accrues its value through the experience of the trip itself.
the only possible way to argue not 300 is via that interest rate route (ie if the 1200 was invested) but the 1200 itself would not be added to the OC, only the interest gained.
but that sounds like an over-thinking man's answer. i think the point of the question was just a) do you know what the most basic finance concept is? and, b) how do you handle weird interview questions/improptu problem solving and analysis
Here's my though process, see if this makes sense. If he had taken the next best option (granpas), he would have gained $400 worth of happiness PLUS he would have an extra $1100 left over in his bank account that he could spend on whatever he wants.
For example, say you only have $1200 and have to spend it all over break. Option 1: Go to Jamaica. Money gone. Option 2: Spend 100 to travel to Granpa. Now you have $1100 left. Let's say the going rate for hookers in Granpas neighborhood is right at 1100 (assume that the price equals personal value). You're either lonely or feeling generous to granpa, so you decide that's the next-best use of 1100. If you had gone to Jamaica, you would have passed up Granpa+hooker. Convert that back to dollars and you've got 400+1100=1500.
In other words, maybe you aren't considering the $1200 cost itself, but you do have to consider what you could use that money for in the next best option. In the next best option, you would be $1100 richer. You give up this 1100 by going to Jamaica, therefore it is opp cost. Tell me this, if you buy a $5 burger, what is the OC of the burger? It's the $5 that you could have used on next-best option. Why wouldn't that apply to the 1200 here?
Patrick may be right about a variance in definitions here, bc my Econ 100 teacher drilled this in our heads so I'm pretty confident.
ibintx - you are completely deluded and wrong. And your Econ 101 teacher would be ashamed of you.
Each project (i.e. anything you can think to do with your money) has an opportunity cost. This, for the 1000th fucking time, is the cost of NOT DOING THE OTHER THING YOU COULD HAVE DONE. In this case, by going to Jamaica, you give up the chance to create $300 worth of value by investing in a trip to gramdpa's. Since you have lost this opportunity, you must factor the COST OF LOSING THIS OPPORTUNITY ( aka the fucking opportunity cost) in your analysis of the costs of going to Jamaica.
So if they ask the follow up question, what is the economic value created by going to Jamaica? You can answer, ($3500 value - $1200 price - $300 opportunity cost = $2000). You don't "give up" $1200 to go to Jamaica as you so moronicly suggest, on the contrary, you "create" $2300. Subtract the opporutnity cost and you have the NPV, or the economic value added for this project.
The alternate question would be this: how much value is destroyed by going to Gpa's? Again, so easy I have tears coming out of my eyes, you half-wits. ($400 value - $100 price - $2300 opportunity cost = -$2000)
Amazing that by doing one or the other you create or destroy the exact same amount. Actually, this is only amazing to a utter nincompoop.
By the way, imbecile, the $5 bucks you use to buy a burger isn't the opportunity cost of the burger. The opportunity cost of buying the burger is the value you would have created (BUIT DIDN'T!!!! YOU LOST THAT OPPORTUNITY!!! IT COST YOU!!!!) if you had instead done the next best thing and bought a chicken sandwich. If a chicken sandwich is $4 and you derive $5 of enjoyment out of it, then the opportunity cost of buying the burger is $1.
Why does the concept of opportunity cost have such a difficult time penetrating the pea brains of so many people?
Only 3 of you got it and about 20 got it wrong.
THE CORRECT ASWWER IS $1500!!!
Here's Why:
You must account for the 1200 dollar cost of the trip because that could be spent on other things. Therefore that is a cost incurred with this opportunity.
Then you have to add the 300 dollar benefit that he lost by not going to his grandpa's (400-100)
1200 plus 300 is 1500
I guess all of you need to retake intro micro hahaha
and my friend got it wrong right. This was for a boutique
Hate to burst your bubble, dude, but this is not correct. The two mutually exclusive opportunities were Jamaica and Grandpa. Opportunity cost is the RETURN on a project you passed up. The only passed up return was $300. That's the only opportunity cost here. Is the $1200 cost of jamaica a return? No. And for that reason $1200 is not an opportunity cost because cash used is not the same as a foregone marginal return.
Opportunity cost, moron, is not "money that could be spent on other things." Opportunity cost is ALWAYS AND EVERYWHERE a foregone return on project that you passed up.
No surprise it was a boutique asking this question because the interviewer must be a goddam idiot.
sorry man, your wrong. the interviewer graduated from the university of chicago in 93'. and chicago is always ranked as the best undergraduate economics school or around the top of the list.
ll cool j:
apparently it wasnt that easy if you got it wrong.
and ZBB congrats on getting it right.
Its fucking ridiculous how much debate there has been over one of, if not the, most basic concepts you learn in Econ 101.
true, but most of the posters got it wrong
horatio haha I was waiting for you to rip that apart
Edit: the interviewer was right. Opportunity cost is the sum of implicit AND explicit costs.
Jhoratio's approach is correct when there are MORE THAN 2 uses for a resource, and the resource can be devoted to only one use at a time.
Van Buren, two things:
Please tell me your futuristic method for investing in two things with the same money. I realize I am pathetic in my limitation to devote resources to only one use at a time. Please enlighten me with your wisdom, for you intrigue me.
An opportunity cost is BY DEFINITION an implicit cost. There is, putz, no such thing as an explicit opportunity cost. Explicit costs are plane tickets, hotel rooms, margaritas. Implicit costs are the next best fucking thing you could have done with your goddamn money.
I suppose you could have gotten cute and said for $100 of my cash I could have created $300 of value visiting Gramps, and with the other $1100 (or in Van Buren's case, $1200, since he can invest in two things at once) I could have put it in the bank and made 4 cents of interest over the10 day period of time I was in Jamaica, so my total opportunity cost was $300.04, but I thought it best to fucking round to the nearest fucking dollar.
From Browning and Zupan's "Microeconomics: Theory & Applications":
"The sum of the explicit and implicit costs associated with using some resource in a particular way is defined to be the resource's economic cost or opportunity cost. The concept of opportunity cost forces us to recognize that costs are not just money payments but also sacrificed alternatives. Where more than two uses for a resource exist and the resource can be devoted to only one use at a time, the opportunity cost of using the resource in a particular way is the value of the resource in its best alternative use."Jhoratio, I've always understood opportunity cost the way you do. For some reason, however, this definition includes explicit costs when there are 2 or fewer alternative uses.
I was taught from beginning that it is both implicit and explicit costs. Why would you not include any additional explicit costs associated with one choice? It makes sense to me.
Given the resources - $1200 and spring break vacation (time)
Wouldn't the value of $1100 (money left over) + $400 (money gained from going to Grandfather's) be the value of the next best thing relative to going to Jamaica?
Sorry if I'm wrong, but I've only recently learned this concept. I don't think you can compare apples to oranges in terms of resources.
If you were given a plane ticket to use over spring vacation and either had a choice of going to Jamaica and gaining $3500 or going to Grandfather's and gaining $500 then the opportunity cost of going to Jamaica would be $500 given that is the next best use of the asset (plane ticket).
You have to adjust so that the same amount of money is spent in either case:
$1200 spent going to Jamaica, $3500 value gained $1200 spent visiting grandpa, $400 + $1100 = $1500 value gained
So you're passing up on $1500. Let's say you could choose between a burger or a sandwich, both cost $5 and you value both at $5:
$5 for burger, $5 value gained $5 for sandwich, $5 value gained
The opportunity cost is $5 for either choice, so you are indifferent. But say you value the burger more than the sandwich:
$5 for burger, $7 value gained $5 for sandwich, $5 value gained
Your opportunity cost for picking the burger is $5, but $7 for picking the sandwich, so you pick the burger to minimize opportunity cost/maximize value gained. Without adjusting so the costs are the same, you would get something like:
$1000 for burger, $1000 value gained $5 for sandwich, $6 value gained
You don't pick the burger just because it gives you more absolute value, because it costs you more too. If you get the sandwich, you can get $6+$995=$1001 (+interest on $995) of value for the same price of $1000.
wrong. wrong. wrong
Opportunity cost doesn't JUST equal $ any moron could tell you The Surplus in monetary utility is 300 usd .....et c ...etc but in the end it don't mean shit
his is oppurinity cost of going to jamaica is NOT going to grandpas
no matter how much fucking money he spends he will be losing his time to visit grandpa jamaica could cost this spoiled fucker 1mil dollars... still what is his oppurinity cost ... not going to grandpas + the 1mil he could have spend any where PERIOD.
so there are two answers to this
1.) Visiting his grandmpa 2.) 1200 usd
the answer was 1500 as stated above. so by your explanation i think you are right?
Monetary Costs Of Jamaica = $1200 Opportunity Cost != Monetary Cost
Opportunity Cost = {Monetary Cost} , {Time Cost} (In context of this problem), {Context of what else he could have done}, {His imaginary value to him}
Opportunity Cost = { real monetary cost: $1200}, {Not seeing grandpa}, {Utility of $3500)
This is why women don't sleep with finance guys unless they are rich.
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