For your birthday, your friends have joined forces and offer you a choice among the following options (they will pay all expenses of your choice): A) A two-week trip to an exotic destination; B) A new, high-tech mountain bike, C) An annual pass to your preferred sports team games, and D) A dinner with your preferred celebrity. Suppose your subjective valuations of these options are as follows: A) $800, B) $700, C) $1500, and D) $1000. If you are a rational individual, you will obviously choose C, the annual pass, because it is the option of your highest valuation.
a) What is your opportunity cost of choosing option C? Explain.
b) Now, suppose your friends announce at the last minute a fifth option, E, a cheque of $1100. What is now your opportunity cost of choosing option C?
c) As you can see, the theory of opportunity cost implies that the cost of an action depends on other, seemingly unrelated facts. Why does this make sense?

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The Answer of For your birthday, your friends have joined forces and offer you a choice among the following options (they will pay all expenses of your choice): A) A two-week trip to an exotic destination; B) A new, high-tech mountain bike, C) An annual pass to your preferred sports team games, and D) A dinner with your preferred celebrity. Suppose your subjective valuations of these options are as follows: A) $800, B) $700, C) $1500, and D) $1000. If you are a rational individual, you will obviously choose C, the annual pass, because it is the option of your highest valuation.
a) What is your opportunity cost of choosing option C? Explain.
b) Now, suppose your friends announce at the last minute a fifth option, E, a cheque of $1100. What is now your opportunity cost of choosing option C?
c) As you can see, the theory of opportunity cost implies that the cost of an action depends on other, seemingly unrelated facts. Why does this make sense?

For Your Birthday, Your Friends Have Joined Forces and Offer