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You win \$100 in a basketball pool. You have a choice between spending the money now and putting itaway for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the \$100 now?

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Video by Kaylee Mcclellan

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02:09

Yi Chun Lin

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Chapter 1

Ten Principles of Economics

How Markets Work

Introduction

03:36

You win $100$ in a basketb…

01:40

You win $100 in a basketba…

02:02

You win $\$ 100$ in a bask…

00:26

01:14

Suppose that after 1 year…

to examine a really basic principle of economics. This example is going to take a look at opportunity cost and were given an example in which we win $100 somehow and we have two options we could either spend it or we could deposit into an account and earn 5% interest. We'd like to know if we choose to spend $100. Now what opportunity? What is the opportunity cost of us choosing to do that? So the opportunity cost is really just this next best alternative in this case, that's how we're going to examine it. So the next best alternative will tell us what our opportunity cost is of choosing to spend the money. And we know that we have two alternatives, right is either spend it or earn 5% interest. So this opportunity costs in this case would be that 5% interest that could be earned so we could actually calculate that if we wanted to. 5% interest of $100 is just 100 times 0.5 which gives us a total of $5 So in this case we can conclude that our opportunity costs here is equal to $5

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