Question

Smith has quit his job in order to return to college to obtain a master's degree in English. HIs annual salary used to be $10,000. His annual expenses are as follows: Tuition & fees= $2000 and books= $300. In addition his annual living expenses for food, housing, etc total about $6000. What is Smith's implicit or opportunity cost for the entire TWO years that it will take him to obtain the degree?

A. $10,000 B. $18,300. C. $12,300 D. $20,000 E. $36,000

Answer 1

Option D is correct. His opportunity or implicit cost is $20000

Explanation:

Opportunity cost or implicit cost is the next best alternative which is lost when a choice is made. In this case, choosing to pursue a Masters in English will lead to Smith giving up his job. The salary he could have earned if he chose the job instead of the degree is the opportunity cost he will incur. His annual salary was $10000 so for a 2 year degree the total opportunity cost is $20000 (10000*2).

The other costs mentioned in the question like tuition, books, housing, food etc are explicit costs, not implicit or opportunity cost. Thereore, they will not be included in the calculations.