Question

The First Church has been asked to operate a homeless shelter in part of the church. To operate a homeless shelter the church must hire a full time employee for $1,200/month to manage the shelter. In addition, the church would have to purchase $400 of supplies/month for the people using the shelter. The space that would be used by the shelter is rented for wedding parties. The church averages about 5 wedding parties a month that pay rent of $200 per party. Utilities are normally $1,000 per month. With the homeless shelter, the utilities will increase to $1,300 per month. What is the opportunity cost to the church of operating a homeless shelter in the church?

Answer 1

Answer: $1,000

Explanation:

Opportunity cost is the benefit that is foregone for an individual by choosing one alternative over other alternatives available to him.

If the opportunity cost is lower for an individual then this will benefit him whereas if the opportunity cost is higher then this will not benefit the individuals.

Therefore, the opportunity cost for operating a homeless shelter is the amount that is received by renting the space of shelter for wedding parties.

Opportunity cost = Average wedding parties per month × Rent per party

                            = 5 × $200

                            = $1,000