April 2013 MC question

[srivadana]

Hi

this is a question appeared in april 2013 uk exam as a multiple choice question:

A student studying one year Masters degree course of Actuarial Science has course fee of £12,000 and could otherwise have had a job paying an after tax income of £20,000. The cost of her accommodation is £7,000 whether she studies or works and the food bill is £3,000 whether she studies or works. The opportunity cost of studying for the Masters degree is:

A £12,000.
B £20,000.
C £32,000.
D £42,000.

My Answer was 30,000 (20,000+7000+3000) which is the value of the best alternative option forgone i.e. working. How is the answer Option C, which is the total cost of pursuing Master's

Shouldn't be the Opportunity cost of Masters degree be the value of taking up a job, which is what has to be forgone in order to pursue the course?

Please clarify (may be i am saturated and my brain doesn't work for the day on such a simple question!)

 

[Graham Aylott]

You're almost there, but not quite!

The opportunity cost of Masters degree is the overall cost of what she has to give up by pursuing the degree compared to the next best alternative, which here is taking the job.

By pursuing the degree, she not only has to give up the job (and so she gives up the income of £20,000), she also has to pay the degree fee of £12,000. So, compared to taking the job, the cost of the degree (in terms of overall effect on her net income) is:

£20,000 + £12,000 = £32,000.

She has to pay £7,000 for accommodation and £3,000 for food whether or not she does the degree or takes the job. Consequently, these costs do not form part of the opportunity cost of the degree, which is therefore just the £32,000.

I hope this makes sense.

Graham