How does opportunity cost related to the problem of choice between alternatives?
1 Answer
Opportunity cost is everything one must give up to obtain something -- therefore, each alternative is related to the opportunity costs of the other alternatives.
Explanation:
If we simplify the problem to the choice between alternative A and alternative B, then A and B each have opportunity costs. If A and B are mutually exclusive, then the opportunity cost of A includes the cost of not choosing B, and vice versa.
For example, consider my opportunity costs of choosing between attending a concert and attending an art exhibit. If both events occur at the same time, they are mutually exlusive. My opportunity cost of attending the concert is the price of the concert plus my time involved in attending -- and that includes the "cost" (foregone enjoyment) of attending the art exhibit. More generally, it includes the cost of giving up whatever my next best alternative would have been. (Maybe I had a third alternative that I would ahave preferred over the art exhibit but not over the concert.)
Time is a significant driver of opportunity cost, because we typically cannot do multiple things at the same time. We can also monetize the cost of time based on what we could earn with our time when we choose to do something else with it.
