Question

The World of Videos operates a retail store that rents movie videos. For each of the last 10 years, World of Videos has consistently earned profits exceeding per year. The store is located on prime real estate in a college town. World of Videos pays per month in rent for its building, but it uses only 50 percent of the square footage rented for video rental purposes. The other portion of rented space is essentially vacant. Noticing that World of Videos only occupies a portion of the building, a real estate agent told the owner of World of Videos that she could add per month to her firm’s profits by renting out the unused portion of the store. While the prospect of adding an additional to World of Videos’s bottom line was enticing, the owner was also contemplating using the additional space to rent video games. What is the opportunity cost of using the unused portion of the building for video game rentals?

Short answer

The opportunity cost of using unused portion for video game rental is $1500.

Step-by-step solution

Definition of Opportunity Cost 

In economic terms, opportunity cost signifies the cost an individual or a firm has to bear on choosing other viable options. The trade-off can occur in terms of money or materials.

Opportunity Cost of Video game rentals

Opportunity cost indicates when one choice is chosen above others, the potential benefit from the other possibilities is lost. The World of Videos has lost benefit since they pay $2400 each month in rent. But they use only 50% of the rented square footage for the purpose of video rental.

Renting out the underutilized half of the firm, according to the real estate agent, would have increased her monthly income by $1500. This amount would have increased her annual profits too. As a result, the opportunity cost of using it for a video game would be $1500 that she would have gotten had she rented it to others.