Question

Kamryn is deciding between three potential activities on Saturday evening:

1) Staying at home and watching her favorite television show, an activity that she values at $18 and that entails no out-of-pocket costs.

2) Going to the movies with her sister to see the latest blockbuster action film, an activity she values at $30 and that entails $15 in out-of-pocket costs.

3) Going out to dinner with her best friend, an activity she values at $40 and that entails $23 in out-of-pocket costs.

What is Kamryn's opportunity cost of going to the movies?

Relative to her next best alternative, what is Kamryn's economic surplus from going to the movies?

Answer 1

The worth of opting for the activities can be calculated as follows: Worth of staying at home and watching television S18 Worth of going for a movie - S30-S15 $15 Worth of going for a dinner with friend S40-S23 S17 Opportunity cost is whatever you sacrifice in grabbing an opportunity. Thus, if Kamryn goes to the movies, then she will sacrifice the worth of staying home (best alternative) and will lose the net benefit of S18. Also, if she had stayed home, apart from getting $18, she would have saved $15 that she has spent on the movies. Therefore, opportunity cost of going to the movies is S33 (S18+S15) The economic surplus from going to the movies can be calculated by subtracting the opportunity cost from the benefit that is received from chosen alternative. Therefore, Benefits received Opportunity cost -30-33 Therefore, the economic surplus from going to the movies isS3