“Opportunity cost” is Select one: a. what the resource could earn in the highest paying alternative use b. the amount of profit a firm is losing by not maximizing its profit c. what a resource is being paid in its current use d. the potential profit from a new venture
The correct answer and explanation is:
Correct Answer: a. what the resource could earn in the highest paying alternative use
Explanation (300 words)
Opportunity cost is a fundamental concept in economics that refers to the value of the next best alternative foregone when a choice is made. It arises because resources—such as time, money, labor, and capital—are limited, and using them for one purpose means giving up the opportunity to use them elsewhere.
Let’s break down each of the answer choices:
- a. what the resource could earn in the highest paying alternative use – ✅ This is the correct definition of opportunity cost. For example, if a farmer uses a piece of land to grow wheat instead of corn, the opportunity cost is the profit that could have been made from growing corn (assuming corn would have yielded higher profit).
- b. the amount of profit a firm is losing by not maximizing its profit – ❌ This refers more to inefficiency or suboptimal business decisions, not directly to opportunity cost.
- c. what a resource is being paid in its current use – ❌ This is simply the actual or explicit cost, not the opportunity cost. Opportunity cost is about what could have been earned instead.
- d. the potential profit from a new venture – ❌ This may seem relevant but is misleading. It only reflects potential gain, not the trade-off or forgone alternative that defines opportunity cost.
Opportunity cost applies in everyday decision-making. For example, if you spend time watching a movie instead of studying, your opportunity cost might be the better grade you could have earned. In business, if a company invests in Project A instead of Project B, the profit from Project B is the opportunity cost.
In summary, opportunity cost is always tied to choosing one option over another, and it emphasizes the value of the best alternative not chosen. This helps individuals and firms make rational and efficient choices.