What is opportunity cost and can you provide an example?

Answer 1

A rational decision maker will choose among available alternatives such that her utility is maximized. The opportunity cost of choosing an alternative is the utility of the highest utility alternative that is not chosen. Suppose that Nellie can spend an hour watching Netflix, reading her econ textbook, or taking a nap. Nellie prefers watching Netflix over taking a nap and prefers taking a nap over reading her econ textbook. Nellie chooses to watch Netflix. The opportunity cost of watching Netflix is the utility she would have gained from taking an hour nap.