Opportunity cost and time

Suppose you’ve just learned how to do your taxes. You estimate that it will take up about two hours of your time if you did it yourself. Your cousin, who happens to love doing taxes, offers to do it for you for $50, with a free tub of ice cream.

If you rejected your cousin’s offer, you’d save yourself $50. But it’d cost you two hours of your time doing whatever you wanted, the actual work of doing your taxes. If you took your cousin’s offer, you'd be getting your taxes done for you. Of course, you’d have to pay her $50 — that’s the cost.

Depending on how much you valued your time, and how much you valued money:

• If you felt that an hour of your time was worth only a dollar (and two hours of your time is worth two dollars), it would probably make sense for you to do your taxes if you felt neutral about it.
• If you felt that an hour of your time was worth $50 on the other hand, letting your cousin do your taxes would probably make pretty good sense since you’d essentially be getting back $100 worth of time for an expense of $50.

Use opportunity cost to find the monetary value of your time.

And that's because it helps put your decisions in context. Costs and benefits are framed in terms of what is most important to you at the time of the decision.

Every time we make a decision involving mutually exclusive alternatives, we will always be subject to this thi...