Answer to Question #293760 in Microeconomics for Marcos

Question

Building a new bridge that connects two towns across a river costs the government a total of $800 million. It would generate a total of $850 million in revenues. The government has already spent $300 million in getting contracts for the new bridge, when experts tell them that they can build a tunnel instead for $700 million generating the same amount of revenue of $850 million as the bridge.
What is the opportunity cost (or economic cost) of building the bridge at the time when $300 million had already been spent?

Answer 1

Solution:

An opportunity cost refers to the foregone benefit that would have been derived from an option not selected.

 

Opportunity Cost = Return on Most Profitable Investment Choice - Return on Investment Chosen to Pursue.

Opportunity cost = (850 – 700) – (850 – 800) = 150 – 50 = $100 million

 

The opportunity cost (or economic cost) of building the bridge at the time when $300 million had already been spent = $100 million.