Economics Case Study on Opportunity Cost.
Suppose Hins has $3000, he can spend it in the following ways:
Donate all the money
Buy a new suit which costs $3000
Put the money in the bank at an interest rate of 0.2% per year.
Hins finally decides to donate all the money because he is a caring and sympathetic person. This means that he gave up the choices of buying a new suit and putting it in the bank. The highest valued option foregone will be the choice of putting the money in the bank because there will be an interest given by the bank.
The full cost of an action equals to the highest valued alternative use of money and the highest valued alternative use of time. As a result, there is no full cost since there is no best alternative use of time in the above options. (i.e. you don’t need to stop doing anything just to wait for the interest.)
Assume the suit has a 50% discount; the suit will cost only $1500. Therefore Hins will have the ability to buy two suits. The value of the suit drops but the opportunity cost of donating all the money will not change because it has nothing to do with the highest valued option foregone.
But if the bank raises the interest rate from 0.2% per year to 0.3% per year, the value of the option putting the money in the bank will rise. Thus, the opportunity cost of donating all the money will rise too because the highest valued option foregone changes.
However, if he is forced to choose the second choice, i.e. buying the suit, the opportunity will be the first choice, i.e. donating the money.
If suits are all sold out and he the bank he wants to go is closed up because he will have no choice or option left but to donate all the money. In this case, opportunity cost doesn’t exist since there are no choices or options.
However, if he is forced to choose the second choice, i.e. buying the suit, the opportunity will be the first choice, i.e. donating the money.
If suits are all sold out and he the bank he wants to go is closed...