L03 Opportunity costs

Construction companies are building new houses on land previously used for farming.

What is the opportunity cost to soci­ety of this activity?

• improved living conditions

• less congestion in city centres

• more homes for new homeowners

• some farm output

Answer explanation

It is the cost of alternatives forgone. The farm output that could have been produced had the new houses not been built is the opportunity cost.

The table shows the various combi­nations of food and clothing which a village can produce using all its resources.

What is the opportunity cost to the village of increasing the production of food from 200 to 300 units?

• 50 units of clothing

• 100 units of clothing

• 200 units of clothing

• 250 units of clothing

Answer explanation

Increasing food production from 200 to 300 units decreases clothing production from 250 to 50 units, thus opportunity cost of 100 more units of food is 200 units of clothing that could have been produced instead.

A woman playing a quiz game starts with no money, but correctly answers the question that is worth $4000.

The next question is worth $10 000 but if she answers incorrectly she will leave the game with no money.

What is her opportunity cost of choos­ing to answer the $10 000 question if her answer is incorrect?

• nothing

• $4 000

• $6 000

• $10 000

Answer explanation

The next best alternative to answer the $10,000 question is to not answer and leave with $4000.

Commercial companies are cutting down tropical rainforests for hard­wood timber.

What is the opportunity cost to soci­ety of this activity?

• tax revenue from the sale of the timber

• the environment that is destroyed

• the products made from timber

  the

• the profits of the companies

Answer explanation

If the tropical rain forests were not cut down for hardwood timber, their next best alternative would have been a contri­bution to better environ­ment.

What, according to the definition of opportunity cost, is sacrificed when a decision is taken?

• An identical alternative

• Any possible alternative

• The least valuable alternative

• The next best alternative

Answer explanation

Opportunity cost is the cost of the next best alternative forgone.

The government of a country with a rapidly increasing population decides to switch resources from investment to increased subsidies to farmers.

What is the opportunity cost of this decision?

• the profit earned by farmers

• the rent of the land on which food

  is grown

• the reduction in investment

• the wages of the farm workers

Answer explanation

If this decision was not taken, resources would have remained in investment causing in­ vestment to increase. So the next best alternative (opportunity cost) of this decision is the reduction in investment.

A firm decides to stop manufactur­ing ovens and to produce washing machines instead.

What is the opportunity cost to the firm?

• the additional washing machines produced

• the cost of producing ovens

• the cost of producing washing

  machines

• the loss of the production of ovens

Answer explanation

Opportunity cost is defined as the next best alternative foregone. In this example you give up the production of ovens to produce washing ma­ chines. Hence, the loss of production of ovens is the opportunity cost.

A student leaves school and decides to spend the next two years at a college to improve her qualifications.

What is the opportunity cost to the student of taking this decision?

• the cost of the course fees at the college

• the increase in job opportunities she will have as a result of her extra qualifications

• the lost production due to her not being in work

• the money she would have earned if she had been in work for the two years

Answer explanation

D Opportunity cost is defined as the next best alternative foregone. The student would have to give up the money she would have earned had she been working.

Sam wrote a list of how he would prefer to spend his Saturday afternoon.

Unfortunately a thunderstorm caused the cricket match and the town parade to be cancelled. Sam went to the cinema. What was the opportunity cost of going to the cinema?

• going to the cricket match

• watching the town parade

• visiting his relatives

• losing his Saturday free time

Answer explanation

In the list the next best alternative of going to cinema is to visit relatives.

A person makes sandwiches at home for five hours each day. She makes 20 sandwiches per hour, and she sells each sandwich for $2 each.

What is the opportunity cost if she takes a holiday on a working day?

• $2

• $40

• 20 sandwiches

• 100 sandwiches

Answer explanation

The opportunity cost of taking a holiday is the 100 sandwiches she could have made instead.