Question

You currently live in Waukesha earning $50,000 (salary and benefits), but would like to live in Door County. Your friend knows this and, therefore, provides an amazing opportunity for you. He has a bed and breakfast in Door County that he is willing to lease to you for $45,000/year. Expected revenue is $200,000/year. Expenses (upkeep, breakfast costs, electricity, etc.) would be $100,000 year. You would need to quit your existing Waukesha job to move to Door County to run this bed & breakfast full-time.

In what situations should you accept your friend's offer and in what situations should you decline this amazing opportunity?

You majored in Chemistry in college. If you move to Door County you would not be using your degree any longer. You are indifferent if you use your Chemistry degree or not. However, your tuition to attain that degree was $115,000 over four years. Should this impact your decision to accept your friend's offer? If so, why? If not, why not?

Answer 1

1. The decision to accept or decline the friend's offer depends on the opportunity cost of the decision. Opportunity cost is the cost of next best alternative. It is not necessarily monetary, it also includes emotional cost, physical cost, mental cost, etc.

The opportunity cost of quiting the job in Waukesha is $50,000, that is, the salary and benefits associated with the job.

Meanwhile, the profit (salary) of running the bed and breakfast full time is: Expected revenue ($200,000)- cost of leasing ($45,000)- expenses ($100,000 )= $55,000.

I would accept this offer if the opportunity cost of staying in Waukesha is higher. Since this would mean foregoing $55,000 for $50,000 the opportunity cost of staying is high. Thus it makes economic sense to accept the offer.

I would reject the offer if the opportunity cost of quiting the job in Waukesha is higher than choosing to stay in Waukesha. For instance, if the net revenue from bed and breakfast was $45,000 then the opportunity cost of leaving the job would have been the salary associated with the job ($50,000).

2. Yes, the tuition fee of Chemistry degree would impact the decision as that cost would also enter the opportunity cost constraint.