Question

Allison will graduate from high school next June. She has ranked her three possible post-graduation plans in the following order: (1) work for two years at a consulting job in her hometown paying $20,000 per year, (2) attend a local community college for two years, spending $5,000 per year on tuition and expenses, and (3) travel around the world tutoring a rock star’s child for pay of $5,000 per year. What is the opportunity cost of her choice?

Suppose you have two boxes of chocolate chip cookies and a friend of yours has 2 gallons of milk. Explain how you can both gain from trade. Is this a gain from trade through better allocation or greater production?

Answer 1

Answer :- As we have the information about the ranking of different alternatives by Allison, it is quite evident that she would opt for the first ranked alternative that is working for two years at a job in her hometown paying $20,000. Therefore the opportunity cost can be seen as the value of her next best alternative which is the cost of attending community college for two years. The opportunity cost, then, is the forgone increase she is likely to see in her salary over her lifetime as a result of developing her skills at the community college for two years. Or, an economist might say, “… as the result of the increase in her human capital.”