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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

A firm has a fixed budget and chooses between machine X and machine Y, which cannot both be bought. Machine X is chosen. Machine Y would have added ₹80,000 a year to profit, and a third option, a fixed deposit, would have earned ₹50,000 a year. What is the annual opportunity cost of choosing machine X?

The opportunity cost is ₹80,000 a year. Opportunity cost is the value of the single next best alternative given up, and machine Y's ₹80,000 profit exceeds the deposit's ₹50,000. Adding the alternatives together would be wrong because only the best forgone option is counted.

  1. A₹1,30,000
  2. B₹80,000Correct
  3. C₹50,000
  4. D₹30,000

Explanation

Opportunity cost is the value of the next best alternative forgone. The alternatives forgone are ₹80,000 (Y) and ₹50,000 (deposit); the best is ₹80,000. Adding them to get ₹1,30,000 is wrong because only the single next best alternative counts.

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