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

Hindustan Agro Ltd. is deciding whether to use its idle warehouse to store its own goods or rent it out for ₹4,00,000 a year. It chooses own use, which would bring ₹6,50,000 of benefit. Which economic concept is best illustrated by the ₹4,00,000 figure?

The ₹4,00,000 is the opportunity cost of using the warehouse itself. It is the income from the best alternative use, renting it out, which the firm gives up by choosing own storage. It is not a sunk cost because it is not a past outlay.

  1. AOpportunity cost of using the warehouse itselfCorrect
  2. BSunk cost already incurred on the warehouse
  3. CMarginal revenue from storage
  4. DIncremental revenue of renting the warehouse

Explanation

The rent of ₹4,00,000 is the value of the next best alternative that is given up by choosing own use, which is precisely opportunity cost. A sunk cost is already spent and cannot be recovered, which is not the case here. Option D is wrong because the rent is forgone, not earned, under the chosen decision.

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