Question

Eva is sitting in the waiting room of a public clinic and contemplating: »Every month I am paying EUR 300 of contributions for public health insurance, therefore, I will sit here and wait for three hours as I usually have to. Namely, visiting a private doctor (with no waiting time) would cost me EUR 60. The only regret is that I could be at home doing the translations to English and earn EUR 25 per hour«.

In Eva's case, identify what are her

relevant Costs________________________________

irrelevant costs_______________________________

opportunity costs______________________________

Comment on Eva's contemplations in the terms of economic profit.

Answer 1

Relevant cost is that cost that will be incurred in the future as a result of a decision. So, relevant cost = 60 EUR.

Irrelevant cost is that cost which stays the same irrespective of which alternative is chosen. So, irrelevant cost = 300 EUR.

Opportunity cost is the cost of next best alternative. So, OC = 25 EUR per hour.

Economic profit is the benefit earned from subtracting total cost from total revenue. Total cost includes the opportunity cost.

Eva's waiting time is quite high, and because of this her oppotunity cost is also high, making economic profit smaller.