Which one of the following is the opportunity cost of a chosen activity ?
- A.Out of pocket cost
- B.Out of pocket cost plus cost incurred by the Government
- C.Value of all opportunities forgone
- D.Value of next best alternative that is given up
Correct answer
Explanation
The correct answer is D, Value of next best alternative that is given up. Opportunity cost is what you sacrifice by choosing one option, measured by the best option you did not take.
Because resources such as time, money and land are scarce, choosing one use means giving up others. Economists count only the single best of the rejected uses, since you could never have had all of them together. For example, if a farmer grows wheat on a field that could otherwise earn ₹40,000 from mustard or ₹30,000 from gram, the opportunity cost of wheat is ₹40,000. The idea underlies the production possibility curve and the concept of economic profit.
A is wrong because out-of-pocket cost is the explicit money spent, which leaves out the benefit given up. B is wrong because adding government costs gives a kind of social cost, not opportunity cost. C is wrong because the alternatives cannot all be enjoyed at once, so their total value is not what is sacrificed.
Exam tip: Opportunity cost = value of the next best alternative forgone, not the sum of all alternatives.
Practice Questions
View allWhich one of the following forms of money supply is considered as the most widely used in the Indian monetary system?
- A.M1
- B.M2
- C.M3
- D.M4
Show answer
M3, called broad money, is the measure of money supply most commonly used by the RBI for analysis and policy.
Read the full explanation →Which one among the following pairs of type of firm and feature is not correctly matched ?
- A.Oligopoly firm : Interdependence in decision-making
- B.Monopolistic competitive firm : Firm is a price setter
- C.Monopoly firm : Produces an efficient level of output
- D.Perfectly competitive firm : Produces socially optimum output
Show answer
A monopolist restricts output and charges a higher price, so it does not produce the efficient level of output. A monopoly is a single seller of a product with no close substitutes and strong barriers to entry.
Read the full explanation →Which one of the following statements is not correct?
- A.When total utility is maximum, marginal utility is zero.
- B.When total utility is decreasing, marginal utility is negative.
- C.When total utility is increasing, marginal utility is positive.
- D.When total utility is maximum, marginal and average utility are equal to each other.
Show answer
At the point where total utility is highest, marginal utility is zero but average utility is still positive, so the two cannot be equal.
Read the full explanation →Which one of the following is not an objective of the MGNREGA?
- A.Providing up to 100 days of skilled labour in a financial year
- B.Creation of productive assets
- C.Enhancing livelihood security
- D.Ensuring empowerment to women
Show answer
The Act guarantees at least 100 days of unskilled manual work, not skilled labour.
Read the full explanation →Which one of the following best explains the "crowding-in effect" observed in India ?
- A.Reduction in private sector borrowing
- B.Public investment leading to increase in private investment
- C.Decline in fiscal deficit
- D.Increase in imports due to higher demand
Show answer
Crowding-in means that government spending pulls private investment in rather than pushing it out. When the government builds roads, railways, ports and power lines, it lowers the cost of doing business and raises demand for cement, steel and machinery.
Read the full explanation →