Question

Suppose that you could either prepare your own tax return in 8 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at $20.00 an hour; the tax specialist will charge you $45 an hour. The opportunity cost of preparing your own tax return is

Answer 1

The opportunity cost of preparing your own tax return is $160, as it is the cost of 8 hours of your time valued at $20 per hour, which is greater than paying a tax specialist $90 for 2 hours of work.

Step-by-step explanation:

The opportunity cost of preparing your own tax return is the value of everything you must give up in order to prepare the tax return yourself. In this case, there are two costs to consider: the cost of your time and the cost of hiring a specialist. If you prepare your tax return on your own, you would spend 8 hours, which you value at $20.00 an hour. So, the cost of your time would be 8 hours × $20.00/hour = $160. Alternatively, if you hire the tax specialist, you would pay them for 2 hours of work at their rate of $45 an hour, amounting to 2 hours × $45/hour = $90. Therefore, the opportunity cost of preparing your own tax return would be the higher value of these two costs, which is the value of your own time, i.e., $160.