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CA Foundation · Business Economics · Nature and Scope of Business Economics

A manager at a Chennai-based firm compares the benefit of a decision with the best alternative benefit that must be given up in order to take it. Which economic principle is the manager applying?

The manager is applying the opportunity cost principle. Opportunity cost is the value of the next best alternative given up when a choice is made, so comparing a decision's benefit with the best forgone alternative is exactly what this principle requires in business decisions.

  1. AOpportunity cost principleCorrect
  2. BEqui-marginal principle
  3. CTime perspective principle
  4. DDiscounting principle

Explanation

The opportunity cost principle says the cost of a choice is the value of the next best alternative forgone. The equi-marginal principle concerns allocating a limited resource among uses so that marginal returns are equal, which is not what is being described here.

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