Opportunity cost is a key concept in Economics. The textbook defines the opportunity cost as the best alternative that must be given up to obtain some item. Use the opportunity cost concept to develop response to the following questions:
(a) Suppose you are a music fan. Lucky enough, you won a free ticket to see a local rock-band concert tonight (with no resale value). There are two other concerts on the same night: one for Taylor Swift and the other for Katy Perry. These two concerts are the only other activities you are considering. The ticket prices for Taylor Swift and Katy Perry’s concerts are $90 and $85, respectively. And on any given day you would be willing to pay up to $110 to see Taylor Swift or $100 to see Katy Perry perform. In other words, if Taylor Swift tickets sold for more than $110, you would pass on the opportunity to see her even if you have nothing else to do. Similarly, you will pass on the opportunity to see Katy Perry if her concert costs you more than $100. There is no other cost of seeing any of these three concerts. According to the information provided, what is your opportunity cost of attending the local rock-band concert? Briefly explain your answer.
(b) Sally owns a local souvenir store. One of the most popular items in her shop is the opal bracelet she made. An opal bracelet costs Sally $28 on average, and is sold for $45. She unfortunately accepted a traveller’s cheque of $100 from a tourist who purchased two bracelets and gave him $10 change. Sally then gave the cheque to her landlord but it bounced so she had to get $100 cash from her bank account to pay her rent. The ongoing interest rate is 3.5%. i. How much money has Sally lost in this incident? Briefly explain your answer. ii. Would your answer to the last question change if the opportunity cost is considered? If so, what is the opportunity cost of this incident? Briefly explain your answer. iii. Sally learns from this incident and decides to never accept any traveller’s cheques in the future. Is it a wise decision? Briefly explain your answer.