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Let me start with an example where I DO understand how to find opportunity cost. Suppose I have choice to either work for firm A (\$1000 wage) or for firm B(\$2000 wage) or for firm C(\$500 wage). If I choose frim B, then I will forgo my best out of remaining alternatives, namely wage that I would get working for firm A.

Now let's add another aspect:traveling time. Working for different firms will imply different time needed to spend on traveling back and forth between my home and work. Suppose I can't monetize saved time, but I prefer to have more free time nonetheless.

I have three choices, between firm A(\$2000 wage, 2 hours traveling time), firm B(\$1500 wage, 1 hour traveling time) and firm C(\$1200 wage, 0.5 hour traveling time). Suppose I chose to work for firm B, what will be the opportunity cost of such decision? Two things confuse me in this case. There seems no clear way to pick the best alternative and then declare its effects (i.e. wage and traveling time) to be opportunity cost. Firm A offers better wage than firm C, but firm C offers lower traveling time than firm A.On ther other hand, our choice has two effects (wage and traveling time), is it really correct to take them both and declare as ONE opportunity cost, rather than two separate opportunity costs?

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I had an insight. We just need to convert both effects into utils. Wage will be positive utils and time wasted will be negative utils. Then we will need to sum up positive and negative utils for each choice. Then the best of remaining choices will be the one with the highest amount of utils. And there will only one opportunity cost, namely utils foregone.

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  • $\begingroup$ Yes, you're on the right track by assigning utilities to each bundle.The "problem" is that the opportunity cost is entirely dependent on preferences in the second case, unlike the first case where the best alternative is clear due to the monotonicity of a utility function. $\endgroup$ – actuarialboi9 Apr 13 at 0:38
  • $\begingroup$ You're on the right track. But even more simply, you could just convert the hours of traveling time into a dollar value then subtract that from wages. $\endgroup$ – Kenny LJ Apr 13 at 1:14
  • $\begingroup$ " you could just convert the hours of traveling time into a dollar value" I said that I can't monetize my free time $\endgroup$ – user161005 Apr 13 at 2:34
  • $\begingroup$ This diverges from the original question but there's a model which studies the relationships between wages and working hours (or leisure time). economicsdiscussion.net/income/… $\endgroup$ – actuarialboi9 Apr 13 at 19:55
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    $\begingroup$ "I can't monetize my free time" -- but you can assign a non-zero monetary value to each hour of your time, even if only roughly. A possible thought experiment to find this value: If someone paid you \$0.01 to travel around pointlessly for an hour, you probably wouldn't do it. But if someone paid you \$1000 to do the same, you probably would. So, the value of your traveling time is probably somewhere between \$0.01 and \$1000 per hour. By thinking of the (rough) value at which you'd be indifferent, you will have found the value of 1 hour of your traveling time. $\endgroup$ – Kenny LJ Apr 16 at 1:09
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Note that as a rational agent you will have preferences on the set of (wage, free time) bundles. Your own answer suggests that these two "goods" are perfect substitutes, but this is not the general case. If your preferences are given by a utility function you can calculate the utilities for the three bundles in your choice set and then proceed in the way you indicated, measuring opportunity costs by utils foregone.

Alternatively, you can for each of the three bundles find a respective indifferent point at the maximal-free-time line in the space of bundles (corresponding to zero traveling time) and compare the wage levels of these points to get a monetary measure of opportunity costs. This corresponds to converting the traveling time contained in each bundle to some wage loss which you would be prepared to face if traveling time could be eliminated from the respective bundle. (If your preferences happen to be quasi-linear in money, this amounts to calculating your willingness-to-pay (WTP) to avoid traveling time, but in the general case this WTP need not be independent of the wage level.)

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