Advertisements
Advertisements
Question
What is opportunity cost? Explain with the help of a numerical example.
Solution
Opportunity cost refers to the value of a factor in its next best alternative use. Assuming that resources and technology remain constant, an economy is producing Good X and Good Y. Different combinations of production of Good X and Good Y are given in the production possibilities schedule:
| Production Possibilities | Good X | Good Y |
`MOC=(DeltaY)/(DeltaX)` |
| I | 0 | 30 | - |
| II | 1 | 27 | -3 |
| III | 2 | 21 | -6 |
| IV | 3 | 12 | -9 |
| V | 4 | 0 | -12 |
At the production point II, 1 unit of Good X and 27 units of Good Y are produced. To produce an additional unit of Good X, 3 units of Good Y must be sacrificed.
Here, the opportunity cost is
Opportunitycost from ItoII `(DeltaY)/(DeltaX)="Amount of good Ysacrifed"/"Amount of good Xgained"=(27-30)/(2-1)=-3`
Thus, the opportunity cost of getting an additional unit of Good X is 3 units of Good Y.
APPEARS IN
RELATED QUESTIONS
Explain the concepts of Opportunity Cost and Marginal Rate of Transformation using a production possibility schedule based on the assumption that no resource is equally efficient in production of all goods.
Define opportunity cost.
A producer starts a business by investing his own savings and hiring the labour. Identify implicit and explicit costs from this information. Explain.
Answer the following question.
Give one difference between accounting cost and opportunity cost.
Answer the following question.
Explain how a producer can maximize profit by using MR and MC curves.
