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Difficulty: HardScale of Preference

An agro-processing cooperative with a capital budget of N250,000\text{N}250,000 arranges its immediate expenditure needs in order of priority on a scale of preference as follows:

1. Repair of main grating machine — N150,000\text{N}150,000
2. Purchase of hydraulic press — N100,000\text{N}100,000
3. Installation of a solar drying shed — N100,000\text{N}100,000
4. Procurement of cassava tubers — N80,000\text{N}80,000

If the cooperative spends its budget strictly according to this scale of preference, what is the opportunity cost of acquiring the hydraulic press?

  1. The installation of the solar drying shedAnswer
  2. B
    N100,000\text{N}100,000, which is the financial price paid for the hydraulic press
  3. C
    The combined value of the solar drying shed and the cassava tubers
  4. D
    The repair of the main grating machine

Answer

The installation of the solar drying shed
A scale of preference lists wants in order of importance. Given a budget constraint of N250,000\text{N}250,000, the cooperative allocates N150,000\text{N}150,000 to item 1 and the remaining N100,000\text{N}100,000 to item 2 (hydraulic press). The opportunity cost of selecting the hydraulic press is the most desirable alternative sacrificed due to that decision, which is item 3, the installation of the solar drying shed.

Step-by-Step Solution

1
Determine which items are satisfied given the budget constraint
With a total budget of N250,000\text{N}250,000, the cooperative satisfies item 1 (Repair of main grating machine at N150,000\text{N}150,000, leaving N100,000\text{N}100,000) and item 2 (Purchase of hydraulic press at N100,000\text{N}100,000, leaving N0\text{N}0).
A rational decision maker satisfies wants in order of priority from top to bottom on the scale of preference until the budget is exhausted.
2
Identify the foregone alternatives resulting from choosing the hydraulic press
The expenditure of the remaining N100,000\text{N}100,000 on the hydraulic press prevents the cooperative from choosing items 3 and 4.
Choosing to purchase the press consumes funds that could otherwise have been used for lower-priority needs.
3
Select the highest-ranked alternative foregone to find the opportunity cost
The highest-ranked unsatisfied item is item 3: the installation of a solar drying shed.
By definition, opportunity cost is the next best alternative foregone, not the financial cost or all unsatisfied wants combined.

Key Concept

Scale of Preference and Opportunity Cost
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Topics

Scale of Preference

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