“I always spend a total of exactly $10 per week on coffee.” b. a significant number of workers have little education In essence, it refers to the hidden cost associated with not taking an alternative course of action. $35 question 1 of 3. Over the next 50 years, this investor dutifully invested $5,000 per year in bonds, achieving an average annual return of 2.50% and retiring with a portfolio worth nearly $500,000. Answer to Question: c. Only D The opportunity cost of an activity is best measured a. only by the monetary costs b. by the number of alternative activities that were forgone c. by the cost difference between the chosen activity and the next best alternative d. by the value expected from the best alternative that is forgone e. as the time wasted choosing among various activities ANS: D Is Subjective 26. Economics, inits simplest form, predicts that rational people will perform anactivity only if doing … Your opportunity cost of choosing a particular activity a.can be easily and accurately calculated b.cannot even be estimated c.does not change over time d.varies, depending on time and circumstances e.is measured by the money you spend on the activity Click here for the SOLUTION a. summed value of all her alternative activities Booster Classes. if I raised the price by as little as 10%.” Choose an answer and hit 'next'. He estimates Your opportunity cost of choosing a particular activity. d. Both A and C If the economy is producing a combination of goods inside its production possibilities c. Only D 1. But when I sold the second one, the price dropped by 80%.” While the opportunity cost of either option is 0 percent, the T-bill is the safer bet when you consider the relative risk of each investment. 1. c. the benefits he could have received from going to the rival college flat tire is Opportunity cost is defined as the value of something that is lost because you choose an alternative course of action. 200 words The problem comes up when you never look at what else you could do with your money or buy things without considering the lost opportunities. And if it fails, then the opportunity cost of going with option B will be salient. e. cannot be determined from the given information additional output that could be produced Opportunity cost is a very important concept in economics, but it is often overlooked by investors. The opportunity cost of a particular activity Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which offer the potential for investment income. In the long run, however, opportunity costs can have a very substantial effect on the outcomes achieved by individuals or companies. Only B and C a. workers are on vacation • For any activity, if MB > MC, people have an incentive to do more of that activity. d. $65 1st order: varies, depending on time and circumstances. Now it’s up to the Furniture manufacturer to decide between the two orders as he has time and labor limitations. 4. In economics, risk describes the possibility that an investment's actual and projected returns are different and that the investor loses some or all of the principal. The amount of time spent on whatever is chosen c. The highest valued alternative foregone as the result of the choice d. The money cost of the option Decision making at the margin means a. However, buying one cheeseburger every day for the next 25 years could lead to several missed opportunities. Option B, on the other hand is: to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. Some would argue that opportunity cost is not a “real” cost because it does not show up directly on a company’s financial statements. Assume that, given a set amount of money for investment, a business must choose between investing funds in securities or using it to purchase new equipment. Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making. Or, in other words, the opportunity cost of 1 mini-computer is 25 calculators. We want to minimize our opportunity … a. the cost of books and supplies at the rival college The company must decide if the expansion made by the leveraging power of debt will generate greater profits than it could make through investments. Opportunity costs are everywhere and occur with every decision made, big or small. If they're cautious about a purchase, many people just look at their savings account and check their balance before spending money. It is important to compare investment options that have a similar risk. of attending college here (tuition, textbooks, etc.) Visual 2: Discussion Questions: Choosing a Snack e. the opportunity cost of producing more output is greater than the value of the Comparing a Treasury bill, which is virtually risk-free, to investment in a highly volatile stock can cause a misleading calculation. Opportunity cost analysis also plays a crucial role in determining a business's capital structure. Having takeout for lunch occasionally can be a wise decision, especially if it gets you out of the office for a much-needed break. Definition. initial levels, p = $2 and Q = 80, if the price of fresh strawberry increases from its original price depends on the individual's subjective values and opinions. If investment A is risky but has an ROI of 25% while investment B is far less risky but only has an ROI of 5%, even though investment A may succeed, it may not. Opportunity cost is the forgone benefit that would have been derived by an option not chosen. a. A Furniture manufacturer who manufactures and sells furniture was given two orders and in which he can only take one order only. What are the factors that influence the choice of a consumer? Carl is considering attending a concert with a ticket price of $35. 10. It is not all the possible things you have given up. d. $10 per hour of studying per week a. a. Attainable If, for example, they had instead invested half of their money in the stock market and received an average blended return of 5.00%, then their retirement portfolio would have been worth over $1 million. The $3,000 difference is the opportunity cost of choosing company A over company B. 11. Mutually exclusive is a statistical term describing two or more events that cannot occur simultaneously. We have MILLIONS OF ANSWERS From Every Subject. 6. The opportunity Let us consider a second example. For the sake of simplicity, assume the investment yields a return of 0%, meaning the company gets out exactly what it put in. The opportunity cost of choosing this option is then 12% rather than the expected 2%. e. 800 words 3. Use the information in Figure 1 to answer questions 4-5 Kalish refers to the high cost of record-keeping and paperwork, as well as the costs associated with incorporation, as one reason that business owners may decide to choose another option- … Still, one could consider opportunity costs when deciding between two risk profiles. In this scenario, investing $10,000 in company A returned $2,000, while the same amount invested in company B would have returned a larger $5,000. Points on the Production Possibilities Frontier are No matter what we choose, there is a next best choice that we give up or an opportunity forgone, that is the opportunity cost. If you are a sodaholic, you have to give up five sodas. I b. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Often, people don't think about the things they must give up when they make those decisions. b. the income he could have earned at the printed circuit board factory plus the direct cost cost of driving to the concert and parking there will total an additional $20. But the opportunity cost instead asks where could have that $10,000 been put to use in a better way. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Menu. QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER. That $3,000 that could have been spent on part-time help during the busy season, or on a new and improved website, is the opportunity cost of choosing … I sold one on Opportunity cost is the highest-valued forgone activity. Mutually Exclusive Economic Alternatives are a group of choices of different utilities – goods, services, investment options, etc., that a person can choose from, usually with respect to though not necessarily, a common time frame or a particular amount of money.For example, a man having $20 can decide among buying a shirt, a cap, an audio CD or a baseball bat. b. may include both monetary costs and forgone income Thus, while 1,000 shares in company A might eventually sell for $12 a share, netting a profit of $2,000, during the same period, company B increased in value from $10 a share to $15. Opportunity Cost means the Cost or price of the next best alternative that is available to a business, company, or investor. What is the utility function and state three areas (fields0 where it can be applied? How Opportunity Cost Works . When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return. 18 Excess returns will depend on a designated investment return comparison for analysis. a. Attainable ... You will need to calculate the opportunity cost for a particular path. 8. What is the opportunity cost for this The cost of the lowest valued alternative not chosen b. a. is the same for everyone pursuing this activity $10 of income per week 4 different types of candy, gum, or crackers, cookies, snacks etc. Opportunity Cost is defined as a benefit that a person could have received, but gave up, to take another course of action.. The difference between an opportunity cost and a sunk cost is the difference between money already spent in the past and potential returns not earned in the future on an investment because the capital was invested elsewhere. When making big decisions like buying a home or starting a business, you will probably scrupulously research the pros and cons of your financial decision, but most day-to-day choices aren't made with a full understanding of the potential opportunity costs. Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. (1) study economics at Iowa State University, (2) work in a printed circuit board factory, d. Both A and C b. d. value of the next most valuable alternative activity minus the value of the chosen activity In other words, by investing in the business, you would forgo the opportunity to earn a higher return. In Figure 1.1, which labeled points are unattainable? Simply put, the opportunity cost is what you must forgo in order to get something. c. level of technology. d. technology must improve before output can increase of pt = 80¢ by 55¢ to $1.35. have no choice but to buy this book.” b. summed value of all her alternative activities minus the value of the chosen activity Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. The opportunity cost of an activity. d. A, B and C If, for example, a company pursues a particular business strategy without first considering the merits of alternative strategies available to them, they might therefore fail to appreciate their opportunity costs. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. PREPARE 1. attending the concert equals. c. Associated with some unemployment Choosing at the margin • Marginal benefit and marginal cost act as incentives — inducements to take a particular action. a. attend the concert, Carl will have to take time off from his part-time job. Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. The idea of opportunity costs is a major concept in economics. 4 Marks of the following? cost from choosing one activity equals the ( c ) Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making. Figure 1 eBay for a high price. How to Calculate Present Value, and Why Investors Need to Know It. $5 of income per week No matter which option the business chooses, the potential profit it gives up by not investing in the other option is the opportunity cost. d. only the tuition and fees paid for taking classes here Because opportunity cost is a forward-looking consideration, the actual rate of return for both options is unknown today, making this evaluation in practice tricky. However, the economic profit for choosing to extract will be $10 billion because the opportunity cost of not selling the land will be $40 billion. Part III Comprehensives (11 Marks) Part II Short Answers The manufacturer has to pay wages @ INR 100/hour to the labor. In Figure 1.1, which labeled points are attainable? b. Only B and C Opportunity cost concerns the possibility that the returns of a chosen investment are lower than the returns of a forgone investment. person of moving from point a to point b? a. (1 per student) Handout: Practice with opportunity cost analysis (1 per student) Overhead transparencies or power points slides: Visual 1: Characteristics of Cost. Opportunity cost is the value of something when a particular course of action is chosen. However, businesses must also consider the opportunity cost of each option. In one hour, George can fix 4 flat tires or type 200 words. 15. Why is this concept of Opportunity Cost … 9. He estimates that the Aside from the missed opportunity for better health, spending that $4.50 on a burger could add up to just over $52,000 in that time frame, assuming a very achievable 5% rate of return. Investors try to consider the potential opportunity cost while making choices, but the calculation of opportunity cost is much more accurate with the benefit of hindsight. d. 50 words 13. His opportunity cost of going to college here includes which Figure-2 illustrates the trade-off for a particular student between time spent studying per This is a simple example, but the core message holds true for a variety of situations. 1. b. b. price (or monetary costs) of the activity. e. $85 Your answer should be written as Q10 – Q13. 1. 5 Marks Instead, another option, assuming it to be better, and more rewarding and fruitful has been selected. c. two hours of studying per week In microeconomic theory, opportunity cost, is what we get in return of an action To elaborate, opportunity cost is the loss or the benefit that could have been enjoyed if … 62439 – Case study for professional year****case study, instruction, Describe an activity, process, or product of a major company/corporation, Activity 6 – Discuss how core factors, cues to quality, and interpersonal factors, Activity Plan – Create an Activity Plan with your site supervisor. 14. Assume the expected return on investment in the stock market is 12 percent over the next year, and your company expects the equipment update to generate a 10 percent return over the same period. You will receive your score and answers at the end. 7. c. some resources are being wasted But economically speaking, opportunity costs are still very real. The opportunity cost of choosing this option is 10% - 0%, or 10%. A firm tries to weight the costs and benefits of issuing debt and stock, including both monetary and non-monetary considerations, in order to arrive at an optimal balance that minimizes opportunity costs. This is the amount of money paid out to make an investment, and getting that money back requires liquidating stock at or above the purchase price. 4 flat tires A) must be the same for everyoneB) is the val. Economists use the term What can you conclude about the price elasticity of demand in each of the following When you have real numbers to work with, rather than estimates, it's easier to compare the return of a chosen investment to the forgone alternative. Make transparencies of Activity 1 (all five houses). c. 1 word Your dashboard and recommendations. Other Costs in Decision-Making: Incremental Costs. Since resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. Only A PART I: Multiple choice (only 15 questions) 15 marks If you are gum fanatic, you surrender ten packs of gum. Bottlenecks, for instance, are often a result of opportunity costs. The opportunity cost of a particular activity varies from person to person depending on time and circumstances faced by the person. Again, an opportunity cost describes the returns that one could have earned if he or she invested the money in another instrument. e. $20 of income per week Using algebra, determine how the equilibrium price and quantity of lemon change from the In order to statements? The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency, and profits would remain stable. After graduating from high school, Steve had three choices, listed in order of preference: If the selected securities decrease in value, the company could end up losing money rather than enjoying the expected 12 percent return. His opportunity cost of fixing a c. $30 Dictionary ! Unattainable or (3) attend a rival college. While financial reports do not show opportunity costs, business owners often use the concept to make educated decisions when they have multiple options before them. As an investor that has already sunk money into investments, you might find another investment that promises greater returns. For example, if you go to the movies you have to give up a certain amount of gum and soda. c. Associated with some unemployment The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of a different investment. d. usually is known with certainty Assume that Kelly’s various possible activities are mutually exclusive. that he will lose 5 hours at work, at a wage of $6 per hour. e. summed value of all her alternative activities minus the value of the next most valuable alternative activity e. measures the direct benefits of that activity “I owned both of the two Jerry Garcia autographed lithographs in existence. For example, Suppose a person X is current view the full answer Previous question Next question Or, the opportunity cost of a calculator is 1/25 of a mini-computer. Further,identifying issues, gathering political information, thinking ordeliberating about that information, and so on, also take time andeffort which could be spent doing other valuable things. The opportunity cost of a particular activity a. is the same for everyone pursuing this activity b. may include both monetary costs and forgone income c. always decreases as more of that activity is pursued d. usually is known with certainty e. measures the direct benefits of that activity c. value of the next most valuable alternative activity The opportunity cost of holding the underperforming asset may rise to where the rational investment option is to sell and invest in the more promising investment. The opportunity cost of choosing an alternative is a. 2. Points inside the production possibilities frontier represent. frontier, then • If MC > MB, people have an incentive to do less of that activity. Although this result might seem impressive, it is less so when one considers the investor’s opportunity cost. A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost. Switch to. Both options may have expected returns of 5%, but the U.S. Government backs the rate of return of the T-bill, while there is no such guarantee in the stock market. Say that you have option A: to invest in the stock market hoping to generate capital gain returns. The opportunity cost of any activity can be measured by the a. value of the best alternative to that activity. 5. An opportunity cost would be to consider the forgone returns possibly earned elsewhere when you buy a piece of heavy equipment with an expected return on investment (ROI) of 5% vs. one with an ROI of 4%. Home. It may sound like overkill to think about opportunity costs every time you want to buy a candy bar or go on vacation. So What? Indeed, it is unavoidable. Excess returns are returns achieved above and beyond the return of a proxy. Practice with Opportunity Cost Analysis. In other words, money received in the future is not worth as much as an equal amount received today. Carl’s opportunity cost of Focusing only upon how to spend money b. 12. I’d lose half my customers From an accounting perspective, a sunk cost could also refer to the initial outlay to purchase an expensive piece of heavy equipment, which might be amortized over time, but which is sunk in the sense that you won't be getting it back. $55 week and income per week from working part-time. Often, they can determine this by looking at the expected rate of return for an investment vehicle. “My economics professor has chosen to use the Krugman/Wells textbook for this class. Only A The internal rate of return (IRR) is a metric used in capital budgeting to estimate the return of potential investments. Alternatives, criteria, opportunity cost, trade-off 2. Consider the case of an investor who, at the age of 18, was encouraged by their parents to always put 100% of their disposable income into bonds. “The pizza delivery business in this town is very competitive. The opportunity cost of choosing the equipment over the stock market is (12% - 10%), which equals two percentage points. The opportunity cost of choosing this option is 10% - 0%, or 10%. Present value is the concept that states an amount of money today is worth more than that same amount in the future. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. Opportunity cost is what you give up when you choose between options. Unattainable It takes time and effortthat could be used for other valuable things, such as working for pay,volunteering at a soup kitchen, or playing video games. c. always decreases as more of that activity is pursued A firm may choose to sell a product in its current state or process it further in hopes of generating additional revenue. Points outside the Production Possibilities Frontier are Even clipping coupons versus going to the supermarket empty-handed is an example of an opportunity cost unless the time used to clip coupons is better spent working in a more profitable venture than the savings promised by the coupons. This is just a fancy way of saying that choices leave you with trade-offs!. b. b. Opportunity cost may be defined as the: a) Dollar cost of the next best alternative resources for producing a good, b) Dollar costs of producing a particular product d. A, B and C Get the detailed answer: What statement can be associated with the opportunity cost of a particular activity? b. Nevertheless, because opportunity cost is a relatively abstract concept, many companies, executives, and investors fail to account for it in their everyday decision-making. Opportunity Cost=FO−COwhere:FO=Return on best foregone option\begin{aligned} &\text{Opportunity Cost}=\text{FO}-\text{CO}\\ &\textbf{where:}\\ &\text{FO}=\text{Return on best foregone option}\\ &\text{CO}=\text{Return on chosen option} \end{aligned}​Opportunity Cost=FO−COwhere:FO=Return on best foregone option​. Thus, the amount of the other commodity sacrificed to produce (get) one extra unit of a particular commodity is its opportunity cost. The opportunity cost of a particular activity a. is the same for everyone pursuing this activity b. may include both monetary costs and forgone income c. always decreases as more of that activity is pursued d. usually is known with certainty e. measures the direct benefits of that activity 2. 2. Assume the company in the above example foregoes new equipment and instead invests in the stock market. These trade-offs, or opportunity costs, are mutually exclusive meaning if you choose one, then you can’t do the other.. a. Materials. The next best choice refers to the option which has been foregone and not been chosen. Although the company’s chosen strategy might turn out to be the best one available, it is also possible that they could have done even better had they chosen another path. The act of voting has an opportunity cost. What is a simple definition of opportunity cost?