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Difficulty: Very hardOpportunity Cost

A software engineer in Lagos currently earns a salary of ₦500,000₦500,000 per month. She is considering quitting her job for one year to pursue one of two mutually exclusive opportunities:

- Opportunity X: Establish an independent tech startup requiring an initial capital investment of ₦3,000,000₦3,000,000, which she must withdraw from her fixed deposit account currently yielding 12%12\% per annum interest. The startup is expected to generate ₦15,000,000₦15,000,000 in total revenue over the year, with total operating expenses (office rent, server infrastructure, and wages) amounting to ₦6,500,000₦6,500,000.
- Opportunity Y: Work as an overseas remote contractor earning a net salary of ₦900,000₦900,000 per month with zero capital investment required.

Calculate, in Naira (₦₦), the economic opportunity cost of choosing Opportunity X for the year.

Answer: 11160000 ₦

Answer

The economic opportunity cost of choosing Opportunity X for the year is ₦11,160,000.
The economic opportunity cost of an action is defined as the total benefit of the next best alternative foregone. By choosing Opportunity X, the software engineer gives up Opportunity Y (worth ₦900,000 × 12 = ₦10,800,000) as well as the interest her ₦3,000,000 capital would have earned in the fixed deposit account (12% of ₦3,000,000 = ₦360,000). Together, the total sacrificed value of this highest-ranked foregone package equals ₦10,800,000 + ₦360,000 = ₦11,160,000.

Step-by-Step Solution

1
Calculate the annual income of all alternative employment options available during the year.
Current Job annual income = ₦500,000 × 12 = ₦6,000,000. Opportunity Y annual income = ₦900,000 × 12 = ₦10,800,000.
Opportunity cost evaluates the sacrifice made regarding alternative choices foregone.
2
Calculate the foregone interest earned if funds remain in the fixed deposit account.
Foregone annual interest = 12% of ₦3,000,000 = ₦360,000.
Selecting Opportunity Y or retaining her current job would leave the ₦3,000,000 intact in savings, earning 12% interest.
3
Determine the net value of the single best foregone alternative option.
Value of Next Best Alternative (Opportunity Y + Savings Interest) = ₦10,800,000 + ₦360,000 = ₦11,160,000.
Economic opportunity cost is defined as the total value of the highest-valued alternative option foregone.

Key Concept

Opportunity Cost as the Next Best Alternative Foregone
Estimated Time:3m 0s
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Topics

Opportunity Cost

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