1.

Concept Opportunity Cost

You won a free ticket to see a Bruce Springsteen concert (assume the
ticket has no resale value). U2 has concert the same night and this
represents the next-best alternative activity. Tickets to the U2 concert
cost $80, and on any particular day you would be willing to pay up to
$100 to see this band. Assume that there are no additional costs of
seeing either show. Based on the information presented here, what is
the opportunity cost of seeing Bruce Springsteen?

I would argue that the opportunity cost in seeing Bruce Springsteen instead of
U2 is twofold:

1) You’re giving up the chance to watch a U2 concert and

2) In this case, the value of the ticket that you are willing to buy is $100, but
the tickets that are being sold only costs at $80. You’re giving up a $20
buyer surplus on the U2 ticket by not buying the ticket.

2. Concert Opportunity Cost

You were able to purchase two tickets to an upcoming concert for $100
apiece when the concert was first announced three months ago.
Recently, you saw that StubHub was listing similar seats for $225
apiece. What does it cost you to attend the concert?

It will cost me $450 in attending the concert because if I choose not to

go, then I can profit $250 from the total sale of $450 of selling them. Therefore,
by choosing to go, I am losing out the possibly making $450, which is basically
the same with as paying $450 to attend the concert. The $200 I spent three
months before is already irrelevant to the costs now. The decision I am facing is
to attend the concert or not. If I do not attend, I can sell the tickets for $225.
Thus, I forego $450 in attending the concert.

3. Housing Bubble – Sunk Cost Fallacy

Due to the housing bubble, many houses are now selling for much less
than their selling price just two to three years ago. There is evidence
that homeowners with virtually identical houses tend to ask for more if
they paid more for the house. What fallacy are they making?
 The fallacy that is being committed is the sunk cost fallacy. Since
homeowners have virtually identical houses they should sell at virtually identical
prices, the purchase price from years ago is already a sunk cost and therefore
should be irrelevant to the pricing decision. It has already been incurred and
can’t be recovered or changed. Due to this housing bubble and the hidden costs
or expenditures that are associated, homeowners with identical houses asking
for more are already performing hidden cost fallacy.

4. Opportunity Cost

The expression “3/10, net 45” means that the customers receive a 3
percent discount if they pay within 10 days; otherwise, they must pay
in full within 45 days. What would the seller’s cost of capital have to be
in order for the discount to be cost justified? (Hint: Opportunity Cost)

In receiving a late payment, the opportunity cost is the forgone benefit of being
paid early. This is determined by a firm’s cost of capital. The 3% interest rate for
35 days correspond to an annual rate 3%*(365/35)=31%.

5. Starbucks – Economies of Scope

Starbucks is hoping to make use of its excess restaurant capacity in the

evening by experimenting with selling beer and wine. It speculates
that the only additional costs are hiring more of the same sort of
workers to cover the additional hours and costs of the new line of
beverages. What hidden cost might emerge?

There could be many hidden costs in the case of shifting Starbucks’ line of
business, from its traditional beverages to an experiment of selling beer and
wine in the afternoon and early evening. One thing to consider in the shift is
hiring new bartenders as it may raise the labor costs and training costs of
employees in the management of new products. Also, the storage and
preparation of cold drinks, like beer and wine, is considerably different from the
storage and preparation of beverages, like coffee. This may suggests two
separate production setup at each store. Thus, there will be an additional
expense on the purchase of equipment for the storage and protection of
alcoholic beverages and increase in its expenses for electricity and maintenance
 on the additional equipment. Aside from that, the Starbucks’ brand is known for
its quiet, conducive place to study or linger in small groups or alone. Serving
alcohol may possibly alter the atmosphere that traditional customers in the
afternoon and early evening will be turned off due to the shift of its target
customers. On top of that, Starbucks is also known for its high quality beverages
that are high quality because of the care in selecting beans, roasting them and
brewing them on the premises. It is not clear that there is much scope for care
in ‘preparing’ beer and wine beverages to add similar value to its new line of
products. If not, this brand extension would weaken the branding of Starbucks in
the long run.

6. Dropping University Courses – Sunk Cost

Students doing poorly in course often consider dropping the courses.

Many universities will offer a refund before a certain date. Should this
affect a student’s drop decision?

I believe that the deadline for dropping of subjects provided by colleges

and universities affects a student’s drop decision if they consider the relevant
benefits and costs of the decision. Some of the benefits of dropping the course
before the deadline include of not receiving a grade for a course that the student
may do poorly in, not failing a course and having it show up on their transcript of
records, and not having to invest more time and energy into the course. Some of
the costs of dropping the course before the drop date deadline include losing the
time, energy and work already invested in the course that the student would
never get back. Suppose if the student drops the course before the deadline,
they get their money back. If the deadline has passed, it becomes a sunk cost.
The student must avoid making a sunk-cost fallacy in this case. This means that
they must avoid making a decision based on irrelevant costs and benefits. The
money is already sunk and irrelevant on whether the student keeps or drops the
course. They should ignore the price from the decision.

Before this date, the tuition is still avoidable. After the deadline date, it becomes
sunk. Before this date, students can still compare the expected benefits to the
tuition cost. After this date, they compare the expected benefits only to avoiding
the hassle costs of continuing to participate in the course. In the end, the drop
date deadline should only be considered if the student considers the relevant
benefits and costs of the decision.
Theories

Opportunity Cost
Sunk Cost
Economies of Scope

References

[Book Section] // Managerial Economics, 4th Edition / book auth. Luke M. Froeb Brian
T. McCann, Michael R. Ward, Mike Shor. - [s.l.] : Cengage Learning, 2016.

[Book Section] // Managerial Economics, 14th Edition / book auth. Bentzen Mark
Hirschey and Eric. - United Kingdom : Cengage Learning, 2016.

Taylor Paul Ferraro and Laura Do Economists Recognize an Opportunity Cost When
They See One? A Dismal Performance from the Dismal Science [Journal]. - [s.l.] :
Walter de Gruyter GmbH, 2005. - 1 : Vol. 4.