CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics
A government decides to use a vacant plot to build a hospital instead of a school, and cannot build both. Which statement correctly describes the economic cost of building the hospital?
The economic cost includes the value of the school forgone. Since the plot cannot serve both purposes, choosing the hospital means sacrificing the next best use. This forgone benefit is the opportunity cost, which must be counted along with the money spent on construction.
- AThe construction money spent is the only cost, as the plot is free
- BThe cost is zero because the government does not earn profit
- CThe cost includes the value of the school forgoneCorrect
- DThe cost is the amount of hospital revenue collected later
Explanation
Because resources are scarce, using the plot for a hospital means the school cannot be built. The value of that forgone school is the opportunity cost and forms part of the true economic cost. Treating the plot as free ignores this alternative use.
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