The World of Videos operates a retail store that rents move videos. For each of

Question

The World of Videos operates a retail store that rents move videos. For each of the last 10 years, World of Videos has consistently earned profits exceeding $25,000 per year. The store is located on prime real estate in a college town. World of Videos pays $2000 per month in rent for its building, but it uses only 50 percent of the square footage rented for video rental purposes. The other portion of the rented space is essentially vacant. Noticing that World of Videos only occupies a portion of the building, a real estate agent told the owner of World of Videos that she could add $1200 per month to her firm's profits by renting out the unused portion of the store. While the prospect of adding an additional $1200 to World of Videos bottom line was enticing, the owner was also contemplating using the additional space to rent video games. What is the opportunity cost of using the unused portion of the building for vidoe game rentals?

Explanation / Answer

video world operates a retail store that rents movie videos. for each of the last 10 years, Video World has consistently earned profits exceeding P250000 per month in rent for its building, but it uses only 50 percent of the square footage rented for video rental purposes. The other option of the rented space is essentially vacant. Noticing that Video World only occupies a portion of the building, a real estate agent told the owner of Video World that she could add P12000 per month to her firm's profits by renting out the unused portion of the store. While the prospect of adding an additional P12000 to Video World's bottom line was enticing, the owner was also contemplating using the additional space to rent video games. What is the opportunity cost of using the unused portion of the building for video game rentals? Opportunity costs is the value of the option given up in order to persue a different option. In this case, if Video World used the space for video game rentals, they would be giving up $12,000 that they otherwise could have gotten if they chose to rent out the space instead.

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