Question

During a holiday party at work, you pay \(\$ 2\) to buy a raffle ticket for a 160 -gigabyte iPod. You win the drawing. Based on a little research online, you discover that the going rate for a hardly used 160-gigabyte iPod is \$200. [LO 8.3] a. What was the opportunity cost of acquiring the iPod? b. What is the opportunity cost of choosing to keep the iPod?

Short answer

a. Opportunity cost of acquiring the iPod is $2. b. Opportunity cost of keeping the iPod is $200.

Step-by-step solution

Understanding Opportunity Cost

Opportunity cost is defined as the value of the next best alternative foregone when making a decision. In this case, it is important to analyze both the cost of acquiring the iPod and the cost of the decision to keep it.

Calculate Opportunity Cost of Acquiring the iPod

To acquire the iPod, you paid $2 for the raffle ticket. Therefore, the opportunity cost of acquiring the iPod is the amount spent to obtain the ticket, which is $2.

Analyzing the Opportunity Cost of Keeping the iPod

After winning the iPod, by choosing to keep it rather than selling it, the opportunity cost becomes the money you could earn by selling the iPod at its market value. The going rate for a hardly used iPod is $200, so the opportunity cost of keeping it is $200.

Key concepts

Economic Decision-Making

Economic decision-making involves choosing between different alternatives while considering their benefits and costs. When faced with a choice, individuals and businesses must weigh various factors to make informed decisions. For example, if you win a 160-gigabyte iPod at a raffle but must decide whether to keep it or sell it, you're engaged in economic decision-making.

Key factors in this process include:

• Resource allocation: Determining how to use limited resources to maximize benefits.
• Goals and priorities: Identifying what you value most in the decision context, like money saved or a wanted item.
• Alternatives: Considering all possible options available.

In making economic decisions, people often utilize cost-benefit analysis to weigh the pros and cons of choosing one option over another.

Consumer Choice

Consumer choice refers to the decisions individuals make regarding the purchase and use of goods and services. This process is influenced by factors like personal preference, prices, and available options. In the example of winning a raffle for an iPod, you have a choice between keeping it or selling it.

Important elements of consumer choice:

• Preferences: Every consumer has unique tastes and desires which guide their economic choices.
• Budget constraints: Consumers operate within financial limits, and these constraints influence their decisions.
• Opportunity cost: The value of the best alternative forgone when making a purchase or decision.

Your choice to keep or sell the iPod involves considering your preferences, financial limits, and what you give up by selecting one option.

Cost-Benefit Analysis

Cost-benefit analysis is a systematic approach to evaluate the strengths and weaknesses of alternatives. It helps individuals and organizations decide the most advantageous course of action by comparing the implied costs and benefits.

When you win an iPod from a raffle, performing a cost-benefit analysis can aid your decision on what to do next.

• Calculate costs: Account for the cost of the raffle ticket, which was $2. This represents a straightforward financial outlay.
• Assess benefits: Determine the potential benefit of selling the iPod for its market price of $200. This amount reflects the opportunity that could be gained by selling.
• Compare alternatives: Contrast the immediate satisfaction or utility from keeping the iPod versus selling it for a financial gain of $200.

By examining both costs and benefits, you can make a reasoned decision regarding whether to keep or sell the iPod, thus reflecting on the opportunity cost of your action.