0
$\begingroup$

I have a question about opportunity cost (from Microeconomics- Case Studies and Applications -3rd Edition by Jeff Borland)

Question 4: Sally Stockbroker has to decide whether to return to university to study for a Master of Business Administration (MBA). The MBA will take three years to complete. Sally knows that the information relevant to calculating opportunity cost is that:

(a) MBA fees will cost $20 000 per year; 

(b) her salary as a stockbroker in every future year of her working life would be $80 000 per year if Sally does not do an MBA

(c) during her time studying, Sally can work as a tutor at the university and earn $ 10,000 per year

(d) other costs of studying such as textbooks that Sally would not otherwise incur amount to $5000 per year.

At present, Sally has not incurred any of these costs. What is the opportunity cost for Sally to do an MBA?

My lecturer in microeconomics said that the opportunity cost will be equal to the summation of what Sally must pay (including the tuition for 3 years + the expenses of studying for 3 years) + the opportunity Sally may lose while she studies MBA

which equal to:

$ The\: Opportunity \: Cost$ $=$ $ {20.000\: \times 3}$ ${+}$ $ {5.000\:\times 3}$ ${+}$ $ {80.000\:\times 3}$ $=$ $ {315.000 \: $}$

But my own answer is using the formula of

$ The\: Opportunity \: Cost$ = ${Return \: of \:forgone \: option}$ $ \:-$ ${Return \: of \:choosing \: option}$

which equal to:

${ 80.000 \times 3 \: - ( 10.000 \: - \: 20.000 - \: 5.000) \: \times 3 \: = (-45.000)$ }$

So which answer is the correct answer, and why it is correct

(I'm a newbie to micro-economics, so please give some empathy for my lack of knowledge)

Thanks in advance !

$\endgroup$

1 Answer 1

-1
$\begingroup$

To calculate the gross opportunity cost of Sally pursuing an MBA, we have to consider both the explicit costs (fees, textbooks) and the foregone income (salary as a stockbroker).

The opportunity cost can be broken down into these components:

Explicit Costs:

  • MBA Fees: \$20,000/year × 3 years = \$60,000
  • Textbook Costs: \$5,000/year × 3 years = \$15,000

The total explicit cost is \$60,000 (MBA fees) + \$15,000 (textbook costs) = \$75,000

Foregone Income:

  • Salary as a Stockbroker: \$80,000/year x 3 years = \$240,000

The total opportunity cost is then the sum of explicit costs and foregone income.

Total opportunity cost = \$75,000 (explicit costs) + \$240,000 (foregone income) = \$315,000

This is the gross opportunity cost as it doesn't account for the \$10,000/year Sally will make doing her tutoring.

Therefore, the net opportunity cost would be \$315,000 - (\$10,000/year x 3 years) = \$285,000

$\endgroup$
6
  • $\begingroup$ What is the difference between net opportunity cost, gross opportunity cost, and total opportunity cost? and why I shouldn't take $10,000/year Sally will make doing her tutoring. for the net opportunity cost (because I think your calculation already did not mention that in the total opportunity cost) - thank you for your answer ! $\endgroup$
    – DTJ
    Oct 4, 2023 at 6:31
  • $\begingroup$ @DTJ Gross opportunity cost simply neglects to account for any income Sally gets during her MBA. But because income generated BECAUSE of her choice to do an MBA will effectively reduce the "lost opportunity", it should be considered in the analysis, hence it gives a net opp cost. If Sally's tutoring gave her an income of \$500,000 a year then it would be an absolute no brainer to do the MBA (assuming she couldn't tutor without doing the MBA. Obviously this is a extreme scenario to prove the importance of net opp cost accounting for new income in your chosen decision. $\endgroup$ Oct 4, 2023 at 8:05
  • $\begingroup$ @csilvia No, explicit costs are included. See this $\endgroup$ Oct 17, 2023 at 21:02
  • $\begingroup$ @csilvia As you were, I've realised my mistakes. I'll make an edit but do please add your own answer :) $\endgroup$ Oct 17, 2023 at 21:08
  • $\begingroup$ @csilvia On 2nd thoughts, potentially not. "The opportunity cost includes both explicit and implicit costs." Explicit cost is cost to do MBA. Implicit cost is forgone income. You have to add both of them to get Opportunity cost $\endgroup$ Oct 17, 2023 at 21:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.