Question

Suppose joe is trying to decide whether to buy a latte at a nearby coffee shop or make a cup of coffee at home. Joe would get $5 worth of value from the latte, and the price of a latte at the coffee shop is $3. Joe would get $2.50 worth of value from a cup of homemade coffee, and it would cost him $1 to make. What is the opportunity cost to joe of buying a latte at the coffee shop?

Answer 1

Answer: The opportunity cost of Joe buying coffee at the coffee shop is $1.50.

Opportunity cost refers to the value of next best alternative that one loses when one makes a choice. It is also known as alternate cost.

We try to assess opportunity cost by finding the difference between the value of benefit expressed in monetary terms and the cost of the next best alternative.

In this question we can calculate the opportunity cost of buying a latte at the coffee shop as:

$Opportunity Cost = Value of home made latte - Cost of making the home made latte$

$Opportunity Cost = 2.50 - 1$

$Opportunity Cost = 1.50$