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Question
Define opportunity cost and provide an example.
Solution
- Opportunity cost refers to the cost of the next best alternative use. In other words, it is the value of the next best alternative foregone.
- For example, a farmer can cultivate both paddy and sugarcane in farmland.
- If he cultivates paddy, the opportunity cost of paddy output is the amount of sugarcane output given up.
- Opportunity Cost is also called “Alternative Cost” or Transfer cost.
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