Understanding Rick's Opportunity Cost in Economics

What is Rick’s opportunity cost of entertainment?

a) $10
b) $15
c) $25
d) $50

Final answer:

The opportunity cost of entertainment for Rick is the value of the food he gives up to enjoy more entertainment. With $50 to spend and the options of eating out at $15 and entertainment at $10, for each unit of entertainment, he forfeits two-thirds of a meal out, making the opportunity cost $15 (option b).

Explanation:

The question posed by the student involves calculating the opportunity cost of entertainment, which corresponds to how much of another good or service Rick must give up in order to enjoy more entertainment, assuming that entertainment is plotted along the horizontal axis. In this scenario, Rick has $50 to spend weekly and the price of eating out is $15 while the price of entertainment is $10.

Opportunity cost is often represented graphically through a budget constraint line, which demonstrates the trade-offs between two different goods or services that can be purchased with a given budget. If Rick decides to spend more on entertainment, he has to give up the chance to spend that money on eating out. For each unit of entertainment he chooses (price of $10), he gives up 2/3 of a meal out since $10 is 2/3 the cost of a $15 meal. In terms of how many units of entertainment Rick can enjoy if he spends all his money on it, the amount would be 5 ($50 budget / $10 per entertainment).

When you consider Rick's total budget of $50, the opportunity cost of choosing entertainment over eating out is the number of meals he could have had instead. For each entertainment event costing $10, he sacrifices 2/3 of a meal out at $15. Therefore, the opportunity cost of entertainment to Rick is not simply the price of the entertainment ($10), but rather the value of the food he has to give up. In this case, that would be one meal out at $15.