Question

Sarah's friends are trying to convince her to leave her summer job one month early, from whic earns $1200 per month, to vacation in Costa Rica. If she goes there, her out-of-pocket expense $1500. What is Sarah's marginal opportunity cost of going to Costa Rica? If the marginal benefit she gets from the vacation is equivalent to $2500, should she go? Explain b. h she c. Now suppose that Sarah has already purchased the plane fare to Costa Rica, which is $800 of the $1500 trip cost. What is her marginal opportunity cost of the trip in this case? If her MB is still $ she do? Explain. t is her marginal opportunity cost of the trip in this case? If her MB is stll $2500, what shoul

Answer 1

Opportunity cost is the next best alternative foregone.

b) For Sarah, the opportunity cost will be

Salary foregone - $1,200 per month

Out-of-pocket expenses - $1,500

Opportunity cost is $1,200 + $1,500=$2,700.

Marginal benefit is $2,500.

Since the marginal benefit is less than opportunity cost, Sarah should not go.

c) Since the ticket has already been purchased, this should be excluded from the out-of-pocket expenses. It is now $1,500 - $800=$700.

In this case the opportunity cost is $700 + $1,200= $1,900. The marginal benefit of $2,500 exceeds the opportunity cost.

Sarah can take her vacation.