Question

What is the opportunity cost in this scenario?Mikael has saved $4,000 for his trip to Brazil. He has calculated that his total "transportation" expenses will be $1,000. The "hotel" will cost him another $1,500. He will spend about $500 on "food". He plans on spending the remaining $1,000 for "sightseeing" and buying souvenirs.While booking his plane ticket, he realizes that the price has gone up. His total transportation expenses will go up by $200. He realizes that he cannot cancel his hotel reservation. He also doesn’t want to go cheap on food. Finally, he decides to give up visiting the popular Ouro Preto during his stay in Brazil.

Answer 1

Opportunity cost is the cost of one extra unit at the expense of another. in this scenario,mikael is sacrificing the visit to ouru preto for his staying in the hotel and having quality food.

Answer 2

All the cost sums up to $4,000 when there is no extra charge. In this case, the opportunity cost is the same with the total cost. In this case Mikael is willing to forgo $4,000 for this opportunity and it makes his opportunity cost. However, since the transportation expenses become $1,200 instead of $1,000. We don't know exactly he buys this ticket or not, but since it is said that "while he was booking", we have to consider that he buys the ticket. The hotel costs $1,500 and it cannot be redeemed. However, $2,700 is a sunk cost, not an opportunity cost. Because in this case, Mikael does not have any alternative. He gave up from his decision in the end.