IAI Actuarial Core Principles · Business Economics · Relationship between economics and business
Which statement about opportunity cost is correct in the context of a firm deciding how to use a limited amount of capital?
Opportunity cost is the value of the next best alternative forgone when a choice is made. It counts only the best rejected option, not all alternatives, and it differs from sunk costs or interest paid.
- AIt is the value of the next best alternative forgone when a choice is madeCorrect
- BIt is the total accounting cost of the chosen project
- CIt is the sum of the values of all alternatives rejected
- DIt is the cost already incurred and cannot be recovered
- It is the interest paid on borrowed funds only
Explanation
Opportunity cost measures the benefit of the single best alternative given up. It is not the sum of all rejected options, and sunk costs are a separate concept that should be ignored in decisions.
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