Question

PROBLEM #1 Don Quixote and Sancho Panza have left La Mancha and come to a fork in the road. Don Quixote chose to travel the middle path, which set him on his fateful quest to save his beloved Dulcinea del Toboso. Had he taken the left path, he’d have travelled to Seville, where he could have made 50 reals as a windmill-tilter. Had he taken the right path, he’d have gone back to La Mancha, where he could have collected his monthly 100,000 reals in rent. Between these two alternative paths, he’d have valued the left path the most. Based on the information given, what is the opportunity cost of saving the Dulcinea del Toboso? Briefly explain your answer.

Answer 1

Opportunity cost = 100,000 - 50 = 99,950 reals. Opportunity cost = return on next best alternative that is not chosen – return on the option chosen Return on left path = 50 reals Return on right path = 100,000 reals Chosen option is left path. Return on next best alternative not chosen = 100,000 reals Return on chosen alternative = 50 reals Therefore, Opportunity cost = 100,000 - 50 = 99,950 reals.