Are opportunity costs relevant to decision making?

Expert Solution

Answer:

“Opportunity cost is the cost of a foregone alternative. If you chose one alternative over another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost is the benefits you lose by choosing one alternative over another one.”

For Example,

1) a firm financing its expansion plan by withdrawing money from its bank deposit. in such cases the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan.

2) An example of an opportunity cost is the$.... in rent revenue you forgo because you chose to use the space for internal production purposes.

While 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. At its core, an opportunity cost is what you lose by choosing one alternative over another.

Now, 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.

Opportunity costs extend beyond just the monetary costs of a decision, but it includes all real costs of making one choice over another, including the loss of time, energy and a derived pleasure/utility.

So,Opportunity are costs relevant to decision making

ekkarill92 answered 2 years ago

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