What is the correct calculation of opportunity cost in economics?

[Kazza_765]

Hi all,

I've just taken my first postgraduate "Managerial Economics" class (aimed at people who haven't studied economics before), and my lecturer has thrown me a curve ball with the concept of opportunity cost. Either my memory's not as good as it used to be, or his isn't.

Anyway, he gave an example problem that went like this...

Jim currently has a job that pays $70,000 per year. He is considering starting up his own company next year.

The cost of starting up his own company (non-recoverable) is $100,000. If he starts up his own business, he will also work part-time for $10,000.

What is Jim's opportunity cost for setting up his own business.

Now, it was my understanding that opportunity cost is the value of the next best alternative. This is also the definition that the lecturer used in class. So in this case, the opportunity cost would be $70,000, because that is what Jim is missing out on by setting up his business.

My lecturer said that the opportunity cost is $160,000 ($70,000 - $10,000 + $100,000), which is what I would have called the total cost, of which the opportunity cost is only one part.Am I mistaken? Is the opportunity cost actually $160,000?edit: oh, and interest rates are zero.

 

[HallsofIvy]

Given your definitions, I would say $160,000. He could be making $70,000 a year. Instead he has to pay $100,000 to start the company, while earning $10,000, a difference of 70000- 100000+ 10000= -160000.