ECON 2103

Tutorial 1

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Opportunity Cost
• Scarcity and choice
• Opportunity cost and choice
• Highest-valued option forgone

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Exercise
Anne has (only) 3 options for the coming Saturday evening: Movie,
Concert, Party.
Movie ticket price: 50, happiness from movie: 120
Concert ticket price: 150, happiness from concert: 250
Party food and drink: 80, happiness from party: 170

• Net value of movie: 120 − 50 = 70

• Net value of concert: 250 − 150 = 100
• Net value of party: 170 − 80 = 90

• Opportunity cost of movie: 50 + max 100, 90 = 150

• Opportunity cost of concert: 150 + max 70, 90 = 240
• Opportunity cost of party: 80 + max{70, 100} = 180

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Exercise
You won a free ticket to see a BLACKPINK concert (which has no resale
value). BTS is performing on the same night and is your next-best
alternative activity. Tickets to see BTS cost $40. On any given day, you
would be willing to pay up to $50 to see BTS. Assume there are no other
costs of seeing either performer. Based on this information, what is the
opportunity cost of seeing BLACKPINK?
a. $0
b. $10
c. $40
d. $50

What is the opportunity of seeing BTS? Which concert will you go to?

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Quick Quiz 1.2
Your opportunity cost of going to a movie is
a. the price of the ticket
b. the price of the ticket plus the cost of any soda
and popcorn you buy at the theatre
c. the total cash expenditure needed to go to the
movie plus value of your time
d. zero, as long as you enjoy the movie and consider
it a worthwhile use of time and money
Answer: c

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Questions for review 1.2
What items would you include to figure out the
opportunity cost of a vacation to Disney World?
• Monetary costs: admission, travel, souvenirs
• Time costs: depends on your next best use of that
time
• if it is staying home and watching TV, the time cost may
be small
• if it is working an extra week hours at your job, the time
cost is the money you could have earned

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Problem 1.1
Describe some of the trade-offs faced by each of the
following:
a. Family deciding whether to buy a new car
• A trade-off between the cost of the car and other things
they might want to buy. For example, buying the car
might mean they must give up going on vacation for the
next two years
• Also, fuel efficient cars are more expensive but regular
cars require spending more on gas. Smaller cars are less
expensive, but bigger cars mean saving time by avoiding
multiple trips

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Problem 1.1
Describe some of the trade-offs faced by each of the
following:
b. A member of Congress deciding how much to
spend on national parks
• One trade-off is between parks and other spending
items or tax cuts. If more money goes into the park
system, that may mean less spending on national
defense or on transportation. Or instead of spending
more money on the park system, taxes could be reduced
• Another tradeoff when deciding how much to spend on
national parks is spending a small amount on a lot of
parks or a larger amount on a single park

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Problem 1.1
Describe some of the trade-offs faced by each of the
following:
c. A company president deciding whether to open a
new factory
• The decision is based on whether the new factory will
increase the firm’s profits compared to other
alternatives. For example, the company could upgrade
existing equipment or expand existing factories.
• The bottom line is: Which method of expanding
production will increase profit the most?

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Problem 1.1
Describe some of the trade-offs faced by each of the
following:
d. A professor deciding how much to prepare for
class
• A trade-off between the value of improving the quality
of the lecture compared to other things she could do
with her time, such as working on additional research or
enjoying some leisure time

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Problem 1.1
Describe some of the trade-offs faced by each of the
following:
e. A recent college graduate deciding whether to go to
graduate school
• The student faces a trade-off between his possible earnings
with a bachelor’s degree and the benefits of an increased
education (such as higher future earnings and greater
knowledge)
• The student also faces the trade-off between spending time
with family or on leisure and spending time studying
• Also, the student may face the tradeoff between taking out
student loans and buying a home or car with a loan

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Problem 1.3
You are planning to spend Saturday working at your
part-time job, but a friend asks you to go skiing.
What is the true cost of going skiing?
• If you are thinking of going skiing instead of
working at your part-time job, the cost of skiing
includes its monetary and time costs, which
includes the opportunity cost of the wages you are
giving up by not working

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Problem 1.3
Now suppose you had been planning to spend the
day studying at the library. What is the cost of going
skiing in this case? Explain.
• If the choice is between skiing and going to the
library to study, then the cost of skiing is its
monetary and time costs including the value of
time spent studying

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Problem 1.4
You win $100 in a basketball pool. You have a choice
between the money now and putting it away for a
year in a bank account that pays 5 percent interest.
What is the opportunity cost of spending the $100
now?
• If you spend $100 now instead of saving it for a
year and earning 5 percent interest, you are giving
up the opportunity to spend $105 one year from
now

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Problem 1.6
A 1996 bill reforming the federal government’s
antipoverty programs limited many welfare
recipients to only 2 years of benefits.
a. How does this change affect the incentives for
working?
• When welfare recipients have their benefits cut off after
two years, they have a greater incentive to find jobs
than if their benefits were to last forever.

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Problem 1.6
b. How might this change represent a trade-off
between equality and efficiency?
• The loss of benefits means that someone who cannot
find a job will get no income at all, so the distribution of
income will become less equal
• But the economy will be more efficient, because welfare
recipients have a greater incentive to find jobs.
• Thus, the change in the law is one that increases
efficiency but reduces equality

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Problem 1.9
In what ways is your standard of living different from
that of your parents or grandparents when they were
your age? Why have these changes occurred?
• This is mainly the result of increased productivity;
an hour of work produces more goods and services
than it used to
• Thus, incomes have continuously risen over time,
as has the standard of living

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Problem 1.10
Printing money to cover expenditures is sometimes
referred to as an “inflation tax.” Who do you think is
being “taxed” when more money is printed? Why?
• When governments print money, they impose a
“tax” on anyone who is holding money because the
value of money is decreased

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