Opportunity Cost in Production Comparison Between Emily and Ben

What is the opportunity cost of producing 1 milkshake for Emily and Ben?

Emily owns an ice cream parlor. In an hour she can produce 40 milkshakes or 40 ice cream sundaes. Ben also owns an ice cream parlor. In an hour he can produce 20 milkshakes or 10 ice cream sundaes.

Answer:

Emily's opportunity cost of producing 1 milkshake is 1. Ben's opportunity cost of producing 1 milkshake is 0.5.

For Emily, the opportunity cost of 1 milkshake is calculated as the number of ice cream sundaes she could have produced divided by the number of milkshakes produced:

Opportunity cost of 1 milkshake for Emily = 40 ice cream sundaes / 40 milkshakes = 1 ice cream sundae

For Ben, the opportunity cost of 1 milkshake is calculated as the number of ice cream sundaes he could have produced divided by the number of milkshakes produced:

Opportunity cost of 1 milkshake for Ben = 10 ice cream sundaes / 20 milkshakes = 0.5 ice cream sundaes

The price of choosing one option over the next best one is known as opportunity cost. One ice cream sundae is Emily's opportunity cost of making one milkshake. The cost to Ben of creating 1 milkshake is equal to 0.5 ice cream sundaes.