Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By subtracting the cost of the chosen option from the cost of the forgone option
B
By identifying the potential returns of both options and considering the higher return as the opportunity cost
C
By estimating the total costs of both options without regard to their potential returns
D
By averaging the costs of both options to determine which decision is more financially sound
Understanding the Answer
Let's break down why this is correct
Answer
To calculate opportunity cost, you first need to identify the two investment options you are considering. Opportunity cost is the value of the next best alternative that you give up when you choose one option over the other. For example, if you have $1,000 to invest in either stocks or bonds, and stocks are expected to earn 10% while bonds are expected to earn 5%, the opportunity cost of choosing bonds is the extra 5% you could have earned by choosing stocks instead. Understanding opportunity cost is vital in cost-benefit analysis because it helps you see what you are sacrificing when making a decision, allowing you to make more informed choices. By considering opportunity costs, you can better evaluate which investment will give you the greatest benefit in the long run.
Detailed Explanation
To find the opportunity cost, you look at what you give up. Other options are incorrect because This answer suggests you only look at costs, not returns; This option ignores potential returns and focuses only on costs.
Key Concepts
opportunity cost
decision-making
cost-benefit analysis
Topic
Calculating Opportunity Costs
Difficulty
hard level question
Cognitive Level
understand
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