CA Foundation · Business Economics · Nature and Scope of Business Economics
A state government in India has limited funds and must decide whether to build a new hospital or a new flyover with the same money. Choosing the hospital means the flyover is not built. The value of the flyover given up is best described as:
The value of the flyover given up is the opportunity cost. Opportunity cost is the benefit of the next best alternative forgone when resources are used for one purpose. Scarcity of funds forces the choice, so choosing the hospital costs society the flyover.
- ASunk cost
- BOpportunity costCorrect
- CMarginal cost
- DFixed cost
Explanation
Opportunity cost is the value of the next best alternative forgone when a choice is made. Here the flyover is the best alternative sacrificed for the hospital. Sunk cost refers to money already spent and unrecoverable, which is not the case here.
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