Question

Lydia currently earns £8,600 per year (same amount after income tax and national insurance) and Patrick, £20,000 (£17,135.84 after tax and national insurance). If Lydia takes the full-time job (which involves changing role), her gross earnings will increase to £18,000 (£15,775.84 after tax and national insurance). Lydia also receives child benefit for Nina, equating to £1076.40 per year.

Question:

Using the concept of opportunity cost, identify two factors that might cause Lydia to have a much larger financial loss over her lifetime if she carries on working part-time for another 3 years than if she chooses to move full-time now.

Answer 1

Opportunity cost is the benefit forgone when one alternative is chosen over another.

In the given situation Lydia is currently earning 8600 per year plus chid benefit equating to 1076.40 per year totalling to 9676.40 per year.

If she takes full time job she will earn net profit of 15775.85 per year. She will earn an additional profit of 6099.45 per year .

If she continues the part time job for 3 years , she will forego a total additional benefit of 37651.15. Also her role at a higher position will be forgone. In a full time job there are more opportunities for career enhancement and there are possibilities that the income in 3 years will increase. If she choose to go full time after 3 years , she would need additional three years for progress . The opportunity for the increased earnings will be gone.