Question

In microeconomics, opportunity cost refers to:

• A. Total cost of production
• B. Accounting cost
• C. Cost of the next best alternative forgone
• D. Marginal cost

Hint:

In exam problems, if a person has three options (X, Y, and Z) ranked in that order of preference, the opportunity cost of choosing X is the value of Y, not the value of Y + Z.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Opportunity cost is a fundamental principle in economics arising from the reality of scarcity.
Because resources (time, money, labor) are limited, choosing one option means giving up the benefits of another.
Step 2: Detailed Explanation:
Opportunity cost does not represent the monetary cost of all choices, but specifically the value of the single most valuable alternative that was not selected.
For example, if you spend an hour studying, the opportunity cost might be the sleep you lost or the leisure time you gave up, whichever was your "next best" preference.
It is an "economic cost" rather than just an "accounting cost" because it includes implicit costs (the value of sacrificed alternatives) alongside explicit costs (actual cash payments).
Option (A) refers to total expenditure; Option (B) refers only to recorded expenses; Option (D) refers to the cost of producing one additional unit.
Step 3: Final Answer:
The opportunity cost is defined as the cost of the next best alternative forgone.