a) Sam pays $600 for 30 days of guitar classes. He attends an hour-lon

a) Sam pays $600 for 30 days of guitar classes. He attends an hour-long class every day. If, instead of attending class, he works at a part-time job, he would be paid $5 an hour. Or, he could work at a fast-food outlet and earn $9 per hour.

Once he has already paid a nonrefundable fee of $600 to enroll in the class, what is his opportunity cost of attending each hour of class?

b) Suppose workers decide to work more and consume less leisure when their hourly wage rate increases. What could explain this behavior?

ANSWER

a) Sam’s opportunity cost will measure the next best use of an hour of his time plus the hourly cost of guitar classes. Once he pays the nonrefundable $600, there is no other cost other than the value of his time. With an hour of time, he has two options: work for $5 per hour, or work for $9 per hour. Therefore, the next best use of an hour that Sam spends on guitar classes is equal to the $9 he could have earned per hour by working at the fast-food outlet. Sam’s opportunity cost of attending his guitar classes is $9 per hour.

b) With an increase in their hourly wage rates, workers work more and consume less leisure due to a change in their opportunity cost. Assuming that the initial wage of an employee is $10 per hour, the opportunity cost of one hour of rest or leisure is $10 per hour. Now, if the wage rate increases from $10 to $20 per hour, the opportunity cost of one hour of rest or leisure also increases to $20 per hour. Therefore, taking an hour of rest becomes more expensive for employees and they tend to work more than they used to.