Which statement best describes opportunity cost?

Which statement best describes opportunity cost?

• A. The benefit foregone from the next best alternative
• B. The total cost of all options considered
• C. A fixed expense unaffected by the decision
• D. The legal penalties for non-compliance

Answer: (A)

Opportunity cost is the value you miss out on when you choose one option over the next best alternative. The statement describes this idea by highlighting the benefit foregone from not taking the next best option. For example, if you spend time and money going to a movie instead of studying for a test, the opportunity cost is the improvement in your test score you gave up, plus any potential earnings or study time forgone. This differs from a fixed expense (which doesn’t change with the decision), or from the total cost of all options considered, which isn’t what opportunity cost measures. It also isn’t about penalties for non-compliance, which are external costs, not the foregone benefits of an alternative.

Opportunity cost is the value you miss out on when you choose one option over the next best alternative. The statement describes this idea by highlighting the benefit foregone from not taking the next best option. For example, if you spend time and money going to a movie instead of studying for a test, the opportunity cost is the improvement in your test score you gave up, plus any potential earnings or study time forgone. This differs from a fixed expense (which doesn’t change with the decision), or from the total cost of all options considered, which isn’t what opportunity cost measures. It also isn’t about penalties for non-compliance, which are external costs, not the foregone benefits of an alternative.