Scarcity, Choice and Opportunity Cost: Question 3

Worked solution

Part (a): The short run and the long run for a consumer

Economists usually introduce the short run and the long run through a firm’s factors of production, but the same underlying idea applies to a consumer. In the short run, at least one of a consumer’s spending commitments is fixed and cannot be altered without a cost or penalty. Here, the household is locked into SupplyCo’s tariff and would have to pay a $150 fee to leave early. In the long run, every commitment becomes variable: once the 12-month contract expires, the household is completely free to change supplier, change how much electricity it uses, or make any other adjustment, with no fee attached.

Part (b): The cost of switching now versus waiting

If the household switches to PowerDirect immediately, it saves $8 per month for each of the 10 remaining months: $8\times10=80$

But switching now also means paying the $150 exit fee. The net financial outcome of switching immediately, over the remaining 10 months, is: $80-150=-70$

So switching now leaves the household $70 worse off than it would be by staying with SupplyCo for the rest of the contract.

This $70 is the opportunity cost of switching immediately rather than waiting: by paying the $150 exit fee today, the household gives up $70 net compared with the alternative of continuing to pay SupplyCo’s tariff for the 10 remaining months and switching to PowerDirect for free as soon as the contract naturally ends. (As a check: if the household instead waits the full 10 months and then switches with no fee, it pays SupplyCo as normal until then and only starts saving $8 a month afterwards. No $150 is ever paid, so waiting avoids the $70 loss entirely.)

Part (c): Discussing short-run versus long-run opportunity cost

In principle, the household’s opportunity cost of moving to the cheaper tariff is indeed lower in the long run than in the short run. In the short run, the fixed 12-month contract means switching requires forfeiting the $150 exit fee, an explicit cost that, as part (b) shows, is not covered by the smaller saving that can still build up in the months left. In the long run, once the contract expires, that fixed commitment disappears: the household can move to the cheaper tariff without forfeiting anything, so the opportunity cost of switching falls close to zero.

However, the extent to which this is true depends on the relative size of the exit fee, the monthly saving, and how many months remain. If the exit fee were smaller, or if only a month or two remained on the contract, the accumulated saving could exceed the fee and switching immediately could actually be worthwhile even in the “short run”. In this particular case, even switching on day one of the 12-month contract would not have recouped the fee, since $8\times12=96$, which is still less than $150, so under these numbers waiting is always the cheaper option, but that conclusion rests on the specific size of the fee and saving given, not on the short run versus long run distinction alone.

It is also worth noting that the long-run opportunity cost is not literally zero: arranging a new supplier still takes some time and effort, and the household forgoes the $8 monthly saving throughout the months it waits, even though it avoids the $150 fee entirely. So the short run versus long run distinction correctly predicts the direction of the difference in this case, but the size of that difference is specific to the numbers involved.

Final answers

• (a) Short run: at least one commitment fixed (the contract). Long run: all commitments variable (contract has ended)
• (b) Net outcome of switching now $=$ -$70; this $70 net loss is the opportunity cost of switching immediately rather than waiting
• (c) Opportunity cost of switching is generally lower in the long run (no exit fee), but the size of the gap depends on the fee, the saving, and the time remaining, and the long-run cost is not quite zero once switching effort is included