This chapter introduces the idea of opportunity cost

Question

a. What is meant by opportunity cost? How are the opportunity costs of various choices compared?
b. What is the opportunity cost of taking a year after graduating from high school and backpacking across Europe? Are people who do so being irrational?

Answer 1

a. Opportunity cost is the best alternative use of a resource. The opportunity cost of a particular choice is measured in terms of the benefit foregone from the next best alternative. To facilitate comparison, the benefits and costs of various choices are translated into monetary units like dollars.
b. The opportunity cost of backpacking across Europe, for a particular person, is the cost of anything else that could have been done in that year. The backpacker could have attended college or started working. These costs are the opportunity costs of the gap year. This, however, does not mean that backpackers are irrational, because the benefits may exceed the cost. Every action has an opportunity cost. The choices that people make are optimal based on their perceived costs and benefits.