Question

An article in Forbes looks at the role of opportunity cost in financial decision making. According to the article, “[w]hile most people are aware of the direct costs of life - for example, when you take money out of your wallet to buy a cheeseburger - many ignore the indirect costs associated with those actions. These are the opportunity costs.” A little later, the article states, “let's say you can choose between eating the aforementioned cheeseburger meal and putting $4.50 into savings. Each choice has benefits and drawbacks. If you choose the burger, you will likely have a nice lunch and a chance to leave the office. If you choose to save the money, you give up that break time and good food, but you get the chance to earn interest on that $4.50. That will give you more money in the future. Either way, you stand to gain and lose something. Every time you make a choice, you're weighing the opportunity cost of that action.”

Using positive economic reasoning, does the article appropriately use the concept of “opportunity cost”?

• A. Yes, there is a choice between saving and buying a cheeseburger. If you buy lunch, you forgo saving the money.
• B. Yes, there is a choice between saving and buying a cheeseburger. If you save the money, you forgo buying lunch.
• C. No, you can both buy a cheeseburger and save, so there is no opportunity cost in this instance.
• D. No, opportunity cost is the value of the next best thing you forgo. Very likely, the next best thing would be another food stuff (e.g., a sandwich) and not financial investment.
• E. Both choices (A) and (B) above.

Answer 1

The correct answer is E. Both choices (A) and (B) above.

Explanation: positive economics is a field of economics that states the cause and effect relationship of the actions. It describe the explanation and deep understanding of the economic concept.

In the given example we understand the concept of opportunity cost and statements A and B gives a clear description and cause and effect relationship between choosing one thing and leaving the other.

Therefore option E is correct.