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You decide to spend $80 on some great shoes and do not pay your electric bill. The opportunity cost is having the electricity turned off, having to pay an activation fee and late charges. You might also have food in the fridge that gets ruined and that would add to the total cost.
Caroline has $15,000 worth of stock she can sell now for $20,000. She wanted to wait two months because the stock was expected to increase. She decides to sell now. The opportunity cost would be determined in two months and would be the difference between the $20,000 and the price she would have gotten if she sold the stock then
Mr. Brown makes $400 an hour as an attorney and is considering paying someone $1000 to paint his house. If he decides to do it himself, it will take four hours. His opportunity cost for doing it himself is the lost wages for four hours, or $1600.
The three different financial decisions which are person would make and the opportunity cost are:
- Spending $100 on a new Nike shoe and the opportunity cost is failing to pay for your electricity bill
- Selling off your crypto investment of $1000 that was expected to increase in value in a month's time. The opportunity cost is the expected profit in one month
- Deciding to paint your own home yourself instead of hiring a painter who would have cost $200. The opportunity cost is your time spent
Opportunity cost is known as a foregone alternative and is usually used together with scale of preference where the most important needs are attended to and the least important ones are left out.
The least important needs which are left out are the opportunity cost.
With this in mind, we can see that from the given financial decisions, there is the purchase of things which are considered most important to the user who had foregone alternatives.
These foregone alternatives are the opportunity cost and we can see that from the first option, there was the opportunity cost of the electricity bill.
In the second option, the opportunity cost was the expected profit.
In the third option, the opportunity cost was the time spent by the home owner who decided to paint his house, instead of hiring a painter to do the job.
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