Professor Alice Goofoff has a sabbatical for a semester to do research on ethnomusicology among the surfers in Kuta Beach, Bali. She has a condo in Tallahassee. The assessment and mortgage payment on the condo is $450 a month. Utilities will be $15 a month if she leaves it empty, her cable costs $21 a month, and the phone will cost $11 a month even if she does not use it. If she disconnects each of these, when she returns she would have to pay $60 to reconnect utilities, $75 to reconnect cable, and $50 to reconnect the phone. She will be away three months and was thinking of just leaving the condo empty while she was gone. However, her Chairman's daughter, Mary, an MBA student, offers to housesit the condo for her, with Mary paying for utilities, phone, and cable, if Alice will pay her $40 a month [she says, to cover her commuting costs]. Alice's initial reaction is to say no, she would want at least $450 in rent from Mary; but her friend Raul Economides tells her to think about it, using the idea of opportunity cost. Assuming that other than money, there is no difference to Alice between the condo being empty and having Mary house sit, is
Connected Disconnect, reconnect
Utilities $15/month $60
Cable $21/month $75
Phone $11/month
$50
Total $47/month
$185
Three times $47 is $141, therefore it is lower cost to leave everything connected; Alice then pays out $141.
If Mary housesits, she pays for Utilities, Cable, and Phone; so Alice is only out what she pays Mary, namely
$40 a month for three months, $120 total -- she is $21 better off.
The most Alice should be willing to pay Mary is what would just leave her better off than leaving the condo empty [which costs $47/month]; so that would be $46.99/month.
[Opportunity cost refers to the next best alternative; compare Alice's situation, in terms of money only, (1) leaving utilities, cable, phone connected, compared with having them disconnected and then paying to reconnect; and then
(2) leaving the condo empty, compared with Mary house-sitting]