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Chapter 2

Q. 2.3

Clean Copy Center hired a permanent employee to operate a copy machine for large jobs. The permanent employee is paid $14 per hour whether or not copy jobs must be performed. Temporary help can be hired for $16 per hour.
a. What is the opportunity cost per hour of using the permanent employee to copy a job if there is no other work for the employee to perform?
b. What is the opportunity cost per hour of using the permanent employee if the employee could be working on another copy job that would generate a value of $12 per hour of work?
c. What is the opportunity cost per hour of using the permanent employee if the employee could be working on another copy job that would generate a value of $20 per hour of work?

Step-by-Step

Verified Solution

a. If there is no alternative use of the employee’s time, the opportunity cost of using the employee is $0 per hour.
b. The cost of hiring a temporary employee ($16/hour) is greater than the increased value of performing the other work ($12/hour). Therefore, the organization will not hire the temporary employee. Using the permanent employee prevents the employee from performing the other work and generating a value of $12 per hour. Under these circumstances, the opportunity cost of using the employee is $12 per hour.
c. The cost of hiring a temporary employee ($16/hour) is less than the increased value of performing the other work ($20/hour). Therefore, the organization will hire the temporary employee if the permanent employee does not have time. Using the permanent employee on another activity causes the copy center to hire a temporary employee. The opportunity cost of using the permanent employee is the cost of hiring a temporary employee, or $16 per hour.