Topic: Opportunity Cost
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19) A consumer has a monthly income of $100 that he wants to spend on two goods: rugs priced at $10 and
chairs priced at $5. What is the consumerʹs opportunity cost of buying a rug? What is his opportunity cost
of buying a chair? Use a table to represent the consumerʹs budget constraint.
Answer: Opportunity cost is the best alternative use of a resource. Buying one rug costs $10, and each
chair costs $5. One rug can be purchased with the same amount of money used to buy two chairs.
Therefore, the opportunity cost of buying a rug is 2 chairs. Similarly, the opportunity cost of buying a chair
is half a rug. The consumerʹs budget constraint is given by:
$100 = 10 × (Quantity of rugs) + 5 × (Quantity of chairs).
The following table shows the various combinations of rugs and chairs that the consumer can buy with
$100:
Budget Quantity of Rugs Quantity of Chairs
100 10 0
100 9 2
100 8 4
100 7 6
100 6 8
100 5 10
100 4 12
100 3 14
100 2 16
100 1 18
100 0 20
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Opportunity Cost
20) Sam pays $600 for 30 days of guitar classes. He attends an hour‐long class every day. If, instead of
attending class, he works at a part‐time job, he would be paid $5 an hour. Alternatively, he could work at a
fast‐food outlet and earn $9 per hour. Once he has already paid a nonrefundable fee of $600 to enroll in the
class, what is his opportunity cost of attending each hour of class?
Answer: Samʹs opportunity cost will measure the next best use of an hour of his time plus the hourly cost
of guitar classes. Once he pays the nonrefundable $600, there is no further cost other than the value of his
time. For an hour of time, he has two options: work for $5 per hour or work for $9 per hour. Therefore, the
next best use of an hour that Sam spends on guitar classes is equal to the $9 he could have earned per hour
by working at the fast‐food outlet. Samʹs opportunity cost of attending his guitar classes is $9 per hour.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Opportunity Cost
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21) Suppose workers decide to work more and consume less leisure when their hourly wage rate
increases. What could explain this behavior?
Answer: With an increase in their hourly wage rates, workers work more and consume less leisure
because of a change in their opportunity cost. Assuming that the initial wage of an employee is $10 per