1 Opportunity and sunk costs (4 points) (a) What is the opportunity cost of an e
ID: 1105059 • Letter: 1
Question
1 Opportunity and sunk costs (4 points) (a) What is the opportunity cost of an extra 10h shift at work, if your alternatives are to spend a maximum of 4h with friends at a bar (valued at 258/h), doing problem sets for a maximum of 2h (valued at 10S/h), and surfing for any amount of time (valued at 15S/h) [You can combine activities as you wish.]? (2) (b) You have just purchased a house for $400,000, paid $18,000 for legal fees and $37,000 for renovations. The market price of the house does not change. If the sales tax on a house were 3% (to be paid by the seller), what is the sunk cost of this purchase? (2)Explanation / Answer
(a) Highest paying alternative is counted as the opportunity cost : So in this case:
Alternative 1 = 4*25 = 100
ALternative 2 = 2*10 = 20
Alternative 3 = 10*15 = 150
So combining :
4h+2h+4h = 4*25+2*10+15*4=180
4h(at bar) +(6h surfing = 25*4+15*6 = 100+90 =190
2h(studying) +8h surfing = 2*10+8*15 = 20+120 = 140
3h at bar +7h surfing = 3*25+7*15 = 180
Thus best alternative is (4h at bar and 6h surfing) =$190.
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