Suppose that you have received $650 as a birthday gift. You can spend it today or you can put the money in a savings account for a year and earn 2 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is

Question

Quizplus · Accepted Answer

The opportunity cost is the value of the next best alternative that was not chosen. In this case, the next best alternative is to put the money in a savings account for a year and earn 2 percent interest. The value of this alternative is $650 * 1.02 = $663.00. Therefore, the opportunity cost of spending the money today is $663.00 - $650 = $13.00.

Suppose That You Have Received $650 as a Birthday Gift