Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending State College is:
A)$35,000
B)$30,000
C)$20,000
D)$15,000

Question

Quizplus · Accepted Answer

If Larry attends State College, he not only has to pay $20,000 (= $30,000 - $10,000)in out-of-pocket expenses, but he also has to give up the value of his next-best option. To determine the value of his next best option, note that the value to Larry from attending Elite U (net of tuition)is $60,000 - $50,000 = $10,000. And, his value from attending NoName U (net of tuition)is $15,000 - 0 = $15,000. So going to NoName U is his next-best option, and his opportunity cost of going to State College is $20,000 + $15,000 = $35,000.

Larry Was Accepted at Three Different Graduate Schools, and Must