Skip to content

IAI Actuarial Core Principles · Business Economics · Relationship between economics and business

A Mumbai general insurer's chief executive must decide whether to use a team of ten analysts on a motor pricing review or on a health product launch. Using them on one means giving up the other. In business economics, the value of the next best alternative forgone is called:

It is the opportunity cost. Because the analysts are scarce, choosing one project means giving up the benefit of the best alternative project, and that forgone benefit is what economists count as the true cost of the decision.

  1. ASunk cost
  2. BOpportunity costCorrect
  3. CMarginal cost
  4. DExplicit accounting cost
  5. Fixed cost

Explanation

Scarce resources force a choice, and the benefit lost from the best alternative not chosen is the opportunity cost. Sunk costs are already incurred and cannot be recovered. Marginal cost relates to producing an extra unit.

Did you get it right without looking?

One question tells you little. A timed set on Relationship between economics and business shows your real accuracy, how long you take and where you lose marks.

Practise Relationship between economics and businessFree diagnostic mock

More Relationship between economics and business questions