Suppose you won a free ticket to see an Ed Sheeran concert (which has no resale value). Bruno Mars is performing on the same night and is your next-best alternative activity. To see Bruno Mars will require a ticket that costs $30. On any given day, you would be willing to pay up to $40 to see Bruno Mars. Assume there are no other costs of seeing either performer. Based on this information, what is the net opportunity cost of seeing Ed Sheeran?

Question

BlackTom AI · Accepted Answer

We start by clarifying the scenario and what opportunity cost means in this context.
- You have a free Ed Sheeran ticket (no resale value).
- The next-best alternative is to see Bruno Mars, which would cost you $30 for a ticket.
- On any given day, your willingness to pay for Bruno Mars is $40.
- There are no other costs beyond the ticket price, and the Ed Sheeran ticket cannot be sold or converted into cash.

Now, evaluate each answer option:

Option 1: "$10". This represents the net value of the best alternative after accounting for its cost. Since you’re willing to pay up to $40 to see Bruno, but would have to spend $30 for the ticket, the net benefit of choosing Bruno over not going to a show is $40 − $30 = $10. Therefore, the opportunity cost of choosing Ed Sheeran over Bruno is the $10 you would gain from attending Bruno instead, i.e., the forgone net benefit.

Option 2: "$0". A $0 opportunity cost would imply that the best alternative has no value or that you could obtain Bruno for free or already have $40 of value without paying. Neither is true here because Bruno costs $30 and you value the experience up to $40, giving a positive forgone value when choosing Ed Sheeran.

Option 3: "$30". This would correspond to forgetting the value of the alternative’s cost or equating opportunity cost to just the ticket price. However, opportunity cost should reflect the net benefit of the alternative, not the gross cost alone. Since you also derive up to $40 in value from Bruno, the net foregone benefit is less than $40 and more than $0.

Option 4: "$40". This would capture the total willingness-to-pay for Bruno as the opportunity cost, ignoring the actual cost you would incur to attend Bruno and the fact you do gain some surplus from Bruno up to $40. The correct computation treats the opportunity cost as the net benefit forgone, which accounts for both willingness to pay and the cost of the Bruno ticket.

Putting it together, the reasoning hinges on comparing the Ed Sheeran option to the net value of the Bruno option: you would forego a net benefit of $10 by choosing Ed Sheeran over Bruno, since Bruno yields up to $40 in value minus the $30 ticket cost, for a net of $10. The other options misinterpret either the net value, the cost, or both.

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