Answer to Question #132710 in Microeconomics for Mehtab Ali

Question

: You graduate from college and are offered three jobs (Job A, Job B, and Job C). Assume that they are identical in all respects (duties, benefits, promotion prospects, and so on) except that the salaries differ, as shown below: Job A $150,000 Job B $120,000 Job C $100,000 First, which of the three jobs would you choose? (No, you can’t have all three!) Because you have made a choice, you have incurred an opportunity cost. What is the opportunity cost of your job choice? Comparing benefits and costs, have you made a rational choice?

Answer 1

Job to choose

Job A will be chosen. It has the highest marginal benefit.

Assuming the student is rational, he/she will consider the marginal benefits and marginal costs of the jobs. Since the jobs are uniform in all respects, despite salaries, only marginal benefits are important. Thus, Job A has the highest marginal benefit in terms of additional income associated with accepting the job offer.

Opportunity cost of the choice

Opportunity cost of choosing Job A = Job B income - Job A income

= $120,000 - $150,000

= -$30,000

= ($30,000)

Faced with the problem of scarcity, a consumer ranks his/her goods in his consumption basket in a scale of preferences, according to their marginal benefits to him/her.

The student will thus draw up a scale of preferences of the three jobs according to their marginal benefits. Job A will occupy position 1, Job B position 2, and Job C will occupy position 3.

Opportunity cost is the value of the next best alternative forgone. $Opportunity \space cost = Income \space from \space the \space next \space best \space alternative \space job \space foregone - Income \space from \space chosen \space Job$ Therefore, by choosing Job A, the student foregoes Job B's additional salary. Job B is the next best alternative to Job A.

The opportunity cost is negative, indicating that the student gained than losing in choosing between the two.

Rationality of the choice

Calculation of opportunity costs:

Job A is the best alternative of Jobs B and C in terms of income. The opportunity costs are therefore as follows:

Job B = $150,000 - $120,000

= $30,000

Job C = $150,000 - $100,000

= $50,000

Calculation of net marginal benefits:

Net marginal benefit = marginal benefit - opportunity cost

Job A = $150,000 - ($30,000)

= $180,000

Job B = $120,000 - $30,000

= $90,000

Job C = $100,000 - $50,000

= $50,000

The choice is thus very rational since it yields the highest net marginal benefit after considering benefits and costs.