Question

The opportunity cost of buying a new car is best measured as:

a) the $20,000 you paid for the car plus the value of the time you spent searching for the car.

b) the $20,000 you paid for the car.

c) the value of the time you spent searching for the car.

Answer 1

The opportunity cost is the amount of sacrifice made in order to get something. It is the sum of both explicit and implicit cost. In this case the explicit cost or the direct payment is $20000 that you pay for a car. The implict cost is the cost that is incurred not explicitly (there is no physical transaction for payment) but you are giving up the activity that could have earned you while you search for a car. Hence the time spent on searching entails an implicit cost (you may have a job that gives you hourly wage so searching time will reduce potential earnings).

Therefore the opportunity cost of buying a new car is best measured as: a) the $20,000 you paid for the car plus the value of the time you spent searching for the car.