Scarcity, Choice and Opportunity Cost: Question 7

Worked solution

Part (a): Profit from each job

Profit is revenue minus costs.

For Job 1: $500-80=420$

For Job 2: $350-30=320$

So Job 1 would earn a profit of $420, and Job 2 would earn a profit of $320.

Part (b): Maximising profit, and the opportunity cost of the choice

Comparing the two profit figures, $420>320$, so Amara should accept Job 1 if her only goal is to maximise Saturday’s profit.

Opportunity cost is the value of the next best alternative given up. Since Job 2 was the only other option available for the same day, the opportunity cost of accepting Job 1 is exactly the profit Amara gives up by not doing Job 2:

$\text{opportunity cost} = \$320$

Part (c): Why the true opportunity cost could be larger

The $320 figure in part (b) only captures the profit Amara would have made from Job 2 on this one Saturday. If the corporate client in Job 2 tends to offer repeat photography work throughout the year, then turning Job 2 down does not just mean losing $320 once. It may also mean losing the chance to build an ongoing working relationship with that client, and with it a stream of future bookings and profit. None of these future amounts are included in the $320 calculated in part (b), so the true opportunity cost of accepting Job 1, once these forgone future benefits are counted, is likely to be larger than $320, even though $320 is the correct measure of the opportunity cost for Saturday’s work alone.

Final answers

• (a) Profit from Job 1 $=$ $420; profit from Job 2 $=$ $320
• (b) Amara should accept Job 1; opportunity cost of accepting it $=$ $320
• (c) The $320 figure ignores the value of repeat future bookings that Job 2’s corporate client might have brought, so the true opportunity cost of accepting Job 1 is likely greater than $320