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Difficulty: Very hardScale of Preference

An artisan tailor with a total capital budget of N60,000\text{N}60,000 prioritizes her business needs in a scale of preference as follows:

1. Industrial sewing machine (N35,000\text{N}35,000)
2. Electric fabric cutter (N25,000\text{N}25,000)
3. Overlock edging machine (N20,000\text{N}20,000)
4. Backup power generator (N40,000\text{N}40,000)

Assuming she rationally allocates her available capital strictly according to her scale of preference, what is the opportunity cost of her choice?

  1. The overlock edging machineAnswer
  2. B
    The monetary expenditure of N60,000\text{N}60,000
  3. C
    Both the overlock edging machine and the backup power generator combined
  4. D
    The backup power generator valued at N40,000\text{N}40,000

Answer

The overlock edging machine
Allocating the N60,000\text{N}60,000 budget according to priority allows the tailor to purchase the industrial sewing machine (N35,000\text{N}35,000) and the electric fabric cutter (N25,000\text{N}25,000). The highest-ranked item she must sacrifice due to limited funds is the overlock edging machine. Thus, the overlock edging machine is the opportunity cost of her choice.

Step-by-Step Solution

1
Calculate capital allocation according to priority
Items 1 and 2 total N35,000+N25,000=N60,000\text{N}35,000 + \text{N}25,000 = \text{N}60,000, completely utilizing the available budget.
A rational decision-maker satisfies wants in strict descending order of priority until income is exhausted.
2
Identify the next best unsatisfied want
The highest-ranked item that could not be acquired is Item 3, the overlock edging machine.
Opportunity cost is defined as the next best alternative foregone when a choice is made.

Key Concept

Opportunity Cost derived from Scale of Preference
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Topics

Scale of Preference

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