Question

You have the option of either going out to dinner with your friends or going to see a movie. You expect to spend $25 dollars at dinner and movie tickets cost $10. You enjoy hanging out with your friends and value dinner with them at $50. However, you have been really looking forward to seeing this movie and would value that experience at value seeing it at $70.

a. What is the accounting cost of going to dinner? Of seeing the movie?

b. What is the opportunity cost of going to dinner? Of seeing the movie?

c. What is the economic cost of going to dinner? Of seeing the movie?

d. Which activity should you choose? And why?

Answer 1

Sol :

A)

i) Accounting cost for going to dinner

= Actual cost of the dinner

= $25

ii) Accounting cost for going to see movie

= Actual cost for going to movie

= $10

B) Opportunity cost is the value of best alternative which if forgine to achieve the alternatives.

i) Opportunity cost of Dinner :

Value of Movie = $ 70

ii) Opportunity cost of movie:

Value of Dinner = $ 50

C) Economic Cost is the summation of Accounting and Opportunity cost .

i) Economic Cost of Dinner

= $25 + $70 = $95

ii) Economic Cost of Movie

= $10 + $50 = $60

D) Activity Should be choosen is - [ Movie ]

As , Accounting cost , Economic Cost , Opportunity cost of Movie is low than the Dinner. So, Activity of Movie should be choosen.