Question

Elena's aunt gave her $100 for her birthday with the condition that Elena buys herself something. In deciding how to spend the money, Elena narrows her options down to four choices:

Option A, Option B, Option C, and Option D. Each option costs $100. Finally, she decides on Option B. The opportunity cost of this decision is:________

a. the value to Barb of Options A, C and D combined.
b. the value to Barb of the option she would have chosen had Option B not been available.
c. the average of the values to Barb of Options A, C, and D.
d. $100.

Answer 1

Answer: b. the value to Barb of the option she would have chosen had Option B not been available.

Explanation:

The opportunity cost of an alternative is the benefit/ value of the next best alternative that would have been picked if the current alternative had not been available.

In this case Elena chose B. The opportunity cost of this decision therefore is the value of the option she would have picked had B not been available because this would be the next best alternative.