Examkin

Question

Difficulty: HardScale of Preference

A commercial printing firm with a capital budget of N500,000\text{N}500,000 intends to acquire equipment to expand production. The proprietor constructs a scale of preference listing potential acquisitions in descending order of priority as follows:

1. Industrial Paper Cutter (N300,000\text{N}300,000)
2. High-Speed Digital Printer (N200,000\text{N}200,000)
3. Heavy-Duty Binding Machine (N200,000\text{N}200,000)
4. Lamination Machine (N100,000\text{N}100,000)

If the proprietor acts rationally by allocating the budget strictly according to this scale of preference, what is the opportunity cost of the decision?

  1. The Heavy-Duty Binding MachineAnswer
  2. B
    The monetary outlay of N500,000\text{N}500,000 spent on equipment
  3. C
    Both the Heavy-Duty Binding Machine and the Lamination Machine combined
  4. D
    The Industrial Paper Cutter and the High-Speed Digital Printer

Answer

The Heavy-Duty Binding Machine
A scale of preference lists wants in order of priority. Given a budget constraint of N500,000\text{N}500,000, a rational producer purchases the top priority items: the Industrial Paper Cutter (N300,000\text{N}300,000) and the High-Speed Digital Printer (N200,000\text{N}200,000). The next best alternative foregone—which is the item immediately following the last purchased item on the scale of preference—is the Heavy-Duty Binding Machine. Therefore, the Heavy-Duty Binding Machine constitutes the opportunity cost of the choice.

Step-by-Step Solution

1
Determine the items purchased using the scale of preference under the budget constraint
With a budget of N500,000\text{N}500,000, the firm selects item 1 (Industrial Paper Cutter at N300,000\text{N}300,000) leaving N200,000\text{N}200,000, and then item 2 (High-Speed Digital Printer at N200,000\text{N}200,000), leaving N0\text{N}0.
Rational economic agents allocate limited funds starting from the highest priority item on their scale of preference.
2
Identify the unselected items remaining on the scale of preference
The unselected items are item 3 (Heavy-Duty Binding Machine) and item 4 (Lamination Machine).
Budget depletion prevents the purchase of remaining items on the list.
3
Apply the definition of opportunity cost to determine the correct alternative foregone
The opportunity cost is the next best alternative foregone, which is the Heavy-Duty Binding Machine.
Opportunity cost is measured by the real sacrifice of the single highest-ranked alternative that cannot be satisfied due to scarcity.

Key Concept

Opportunity Cost derived from a Scale of Preference under Budget Constraints
Estimated Time:1m 30s
Rate this question

Topics

Scale of Preference

More questions from this topic