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Difficulty: EasyOpportunity Cost

An entrepreneur in Port Harcourt has sufficient capital to establish either a palm oil refinery or a commercial fish farm. If he chooses to invest in the palm oil refinery, what is the opportunity cost of his decision?

  1. A
    The expected financial profit generated from operating the palm oil refinery
  2. The return and benefits foregone from not establishing the commercial fish farmAnswer
  3. C
    The total amount of money spent on purchasing equipment for the palm oil refinery
  4. D
    The combined operational costs of both the palm oil refinery and the fish farm

Answer

The return and benefits foregone from not establishing the commercial fish farm.
Opportunity cost (or real cost) refers to the next best alternative foregone when an economic decision is made. By allocating capital to the palm oil refinery, the entrepreneur sacrifices the potential returns from the commercial fish farm.

Step-by-Step Solution

1
Identify the choices available to the decision-maker.
The entrepreneur must choose between Option 1 (palm oil refinery) and Option 2 (commercial fish farm).
Opportunity cost arises only when scarcity forces a choice between alternative courses of action.
2
Identify the selected choice and the sacrificed alternative.
The selected choice is the palm oil refinery, leaving the commercial fish farm as the sacrificed alternative.
Opportunity cost is measured by the value of the next best alternative that is given up.
3
Formulate the definition of opportunity cost for this context.
The opportunity cost is the yield or profit foregone from the commercial fish farm.
Real cost in economics is expressed in terms of goods, services, or benefits foregone, not monetary expenditure.

Key Concept

Opportunity Cost
Estimated Time:45s
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Opportunity Cost

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