Opportunity cost is an economic term for the loss created when one decision is chosen over another decision. For example, the cost to study for a full-time Masters in Business Administration (MBA) may be $50,000.
This number, however, does not include the opportunity cost of study. The opportunity cost would be the loss of two years of income. If the MBA is expected to increase income from $40,000 to $50,000, it would actually take the MBA holder 13 years to break even, excluding inflation and financing.
Educational Cost = -50,000
Opportunity Cost = Income Loss: -40,000 yr 1 – 40,000 yr 2 = -80,000
Total Cost = $130,000
Marginal Benefit of MBA = 10,000 per year
Break-even = Total Cost/ Marginal Benefit = 13 years.
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