CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics
Ramesh owns a shop and can either run it himself, earning a business profit of ₹3,00,000 a year, or close it and take a job paying ₹4,00,000 a year. If he runs the shop, what is the opportunity cost of that decision in terms of the foregone alternative?
The opportunity cost is ₹4,00,000, the salary from the job he gives up. Opportunity cost is the value of the best alternative forgone, not the profit earned or the net difference. The ₹1,00,000 shortfall is only the comparison between the two options.
- A₹3,00,000
- B₹1,00,000
- C₹4,00,000Correct
- D₹7,00,000
Explanation
Opportunity cost is the value of the next best alternative given up. By running the shop Ramesh forgoes the job paying ₹4,00,000. The ₹1,00,000 figure is the net disadvantage, not the opportunity cost, and ₹7,00,000 wrongly adds both.
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