# Opportunity Cost

Business I · Introduction to Economics · https://tryals.app/learn/business-i/opportunity-cost

## The Real Price of Anything

The **opportunity cost** of a choice is the value of the **next-best alternative** you give up by making it. Not all alternatives, just the single best one you actually forgo. Economists call this rule: **there is no such thing as a free lunch**, because resources always have another use.

A year of university costs tuition, but also the **forgone salary** you didn't earn while studying. If you could have made 18,000€ working, that lost income is part of the cost.

> **Key idea:** Opportunity cost = the value of the best forgone alternative.

Societies face this too. A government building a stadium gives up the schools that same budget could have built. An economy at full employment must sacrifice one good to produce more of another.

## Rules and Pitfalls

Applying opportunity cost requires strict accounting. Follow these rules to avoid bad decisions:

| Counts | Does not count |
| --- | --- |
| Forgone salary while studying | Food you would eat anyway |
| Best single alternative forgone | The sum of **all** alternatives |
| Evening of work skipped for a ticket | **Sunk costs** already spent |

> **Common pitfall:** Adding up every alternative. You could only do **one** other thing with your time, so opportunity cost is only the value of the best alternative, never the total of all possible options.

Remember that **sunk costs** are unrecoverable and have no alternative use left. Rational economic decisions look only forward.

## Practice questions

6 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. A firm owns its warehouse outright and books zero rent, concluding the storage operation is profitable. What has the accounting missed?

A. Nothing; owning the asset genuinely eliminates the rental cost
B. The implicit cost of the warehouse, the forgone rent
C. The interest that would have been paid had the warehouse been financed by debt
D. Depreciation of the building, which should be charged annually

**Answer:** B. The implicit cost of the warehouse, the forgone rent

**Why:** The next-best use of the building is renting it out, and refusing that rent is a payment made in forgone income rather than cash. Economic profit subtracts implicit costs and accounting profit does not, which is why a business can look profitable on paper and be destroying value.

Page: https://tryals.app/practice/business-i/opportunity-cost/a-firm-owns-its-warehouse-outright-and-books-zero-rent-concluding

### 2. An entrepreneur quits a 40,000€/year job and pays 25,000€/year in business expenses. The business brings in 70,000€ of revenue. Set the slider to her **economic profit** in € (accounting profit minus forgone salary).

**Answer:** 5000 (within ±1000)

**Why:** Accounting profit is 45,000€, but the venture’s true margin over her best alternative is $45{,}000 - 40{,}000 = 5{,}000$€. Economic profit asks not "did I make money?" but "did I beat the road not taken?"

Page: https://tryals.app/practice/business-i/opportunity-cost/an-entrepreneur-quits-a-40-000-year-job-and-pays-25-000-year-in

### 3. A student turns down a €30,000 job to study, paying €10,000 in fees. Why is the opportunity cost €40,000 rather than €10,000 or €70,000?

A. Because it is only the money actually paid out, which is the €10,000 in fees
B. Because every rejected alternative counts, so all forgone salaries add up
C. Because opportunity cost excludes explicit costs like fees
D. Because it is the fees plus the single best forgone alternative

**Answer:** D. Because it is the fees plus the single best forgone alternative

**Why:** Opportunity cost is explicit plus the best implicit alternative. Adding up every rejected option double-counts, because taking one would have ruled out the rest anyway.

Page: https://tryals.app/practice/business-i/opportunity-cost/a-student-turns-down-a-30-000-job-to-study-paying-10-000-in-fees

### 4. Sort each cost by its nature in the decision at hand.

**Answer:**

- Explicit cost: Cash paid for raw materials
- Opportunity cost: Salary the founder gave up to start the firm, Interest the invested savings would have earned
- Sunk cost: Last year’s failed ad campaign, already paid

**Why:** Explicit costs leave receipts, opportunity costs leave no paper trail but are just as real, and sunk costs should leave decisions entirely.

Page: https://tryals.app/practice/business-i/opportunity-cost/sort-each-cost-by-its-nature-in-the-decision-at-hand

### 5. Match each decision to its most important opportunity cost.

**Answer:**

- Government builds a stadium → The schools the budget could have funded
- Farmer plants wheat → The barley the field could have grown
- Student takes a gap year job → A year of study and its future returns
- Firm keeps cash idle → The interest an investment would have paid

**Why:** In every case the cost is the best road not taken, resources have alternatives even when the accounting shows none.

Page: https://tryals.app/practice/business-i/opportunity-cost/match-each-decision-to-its-most-important-opportunity-cost

### 6. You bought a 30€ cinema ticket (non-refundable). An hour before the film, a friend offers a free concert you’d enjoy much more. What does economics say?

A. Go to the concert, the 30€ is sunk either way
B. Go to the film only if the concert is worth less than 30€
C. Go to the film, otherwise the 30€ is wasted
D. Flip a coin, since the values are incomparable

**Answer:** A. Go to the concert, the 30€ is sunk either way

**Why:** The 30€ is gone in both futures, so it cancels out of the comparison. Only tonight’s enjoyment differs, and the concert wins. Honoring sunk costs is how people waste an evening to justify a banknote.

Page: https://tryals.app/practice/business-i/opportunity-cost/you-bought-a-30-cinema-ticket-non-refundable-an-hour-before-the