Question

Suppose Kim, a rational decision maker, is considering going to see Zoe Boekbinder in concert. The price of a ticket is $10 and tickets are non-refundable/non-exchangeable. To attend the show, however, Kim would have to give up the chance to work two hours of overtime, for which she would have been paid a total of $30 (i.e., $15 per hour). Suppose further that Kim had purchased a ticket before making the choice between working or going to the concert.

a. What is Kim’s benefit from seeing Zoe?

b. What is Kim’s opportunity cost of seeing Zoe?

c. What is Kim’s benefit from working?  

d. What is Kim’s opportunity cost of working?

e. Will Kim choose to work or see Zoe? Why? Explain.

f. What is Kim’s sunk cost in making her decision?

Answer 1

(a) Kim’s benefit from seeing Zoe is the enjoyment and entertainment she receives from seeing the concert of Zoe.

(b) As it is given that $10 she have already incurred $10 for tickets and are not refundable and hence they will not get included in any decision or will not be included in any opportunity cost. Hence Opportunity cost of seeing Zoe is the chance to work two hours of overtime, for which she would have been paid a total of $30 (i.e., $15 per hour). Hence Kim’s opportunity cost of seeing Zoe is $30.

(c) Kim benefit from working is the amount she earned if she work for 2 hours(overtime) i.e. $30

(d) As it is given that $10 she have already incurred $10 for tickets and are not refundable and hence they will not get included in any decision or will not be included in any opportunity cost. Hence Opportunity cost of working is the enjoyment and entertainment she receives from seeing the concert of Zoe.

(e) Kim will choose to see Zoe if she values enjoyment and entertainment she receives from seeing the concert of Zoe more than $30( that she will earn if she work overtime) Similarly, Kim will choose to work if she values enjoyment and entertainment she receives from seeing the concert of Zoe lesser than $30(that she will earn if she work overtime). Hence It all depends on how much she values seeing Zoe.

(f) Sunk cost is the cost i.e. not refundable and in the case Sunk cost is the cost of ticket that she already purchased and it is not refundable or exchangeable, hence in this Case sunk cost is $10