Suppose that you could either prepare your own tax return in 15 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at $11.00 an hour; the tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is

Question

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The opportunity cost of preparing your own tax return is the value of the next-best alternative foregone, which in this case is the value of the time you could have spent on other activities if you did not prepare your own tax return.

If you choose to prepare your own tax return, it would take you 15 hours, and the opportunity cost of those 15 hours would be:

Opportunity cost = time x hourly rate
Opportunity cost = 15 x $11
Opportunity cost = $165

On the other hand, if you hire a tax specialist, it would take only 2 hours, but you would have to pay $55 an hour, or a total of:

Cost of hiring a tax specialist = time x specialist's hourly rate
Cost of hiring a tax specialist = 2 x $55
Cost of hiring a tax specialist = $110

Therefore, the best choice would be to hire a tax specialist, because the cost of hiring the specialist is lower than the opportunity cost of preparing your own tax return.

Suppose That You Could Either Prepare Your Own Tax Return