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Difficulty: MediumScale of Preference

A farmer with an available capital of N250,000\text{N}250,000 lists his pressing farm needs in order of priority as follows:

1. Purchase of high-yield seeds (N250,000\text{N}250,000)
2. Construction of an irrigation channel (N200,000\text{N}200,000)
3. Hiring additional farm labor (N150,000\text{N}150,000)
4. Installation of solar pest repellers (N100,000\text{N}100,000)

If the farmer allocates his entire budget to satisfy the highest priority item on his scale of preference, what is the opportunity cost of his decision?

  1. The construction of an irrigation channelAnswer
  2. B
    The monetary expenditure of N250,000\text{N}250,000 paid for the seeds
  3. C
    The purchase of high-yield seeds
  4. D
    The combined value of hiring extra labor and installing solar pest repellers

Answer

The construction of an irrigation channel
A scale of preference arranges wants in descending order of importance. When a consumer or producer makes a decision based on a scale of preference, the opportunity cost is the immediate next best alternative that is sacrificed. In this scenario, purchasing high-yield seeds is the first choice, making the construction of an irrigation channel the most preferred alternative foregone.

Step-by-Step Solution

1
Identify the item selected based on the scale of preference
The farmer selects the purchase of high-yield seeds (N250,000\text{N}250,000), which uses up the entire available budget.
Economic agents satisfy wants starting from the highest priority on their scale of preference.
2
Determine the next best alternative on the scale of preference
The item directly below the chosen item in order of priority is the construction of an irrigation channel.
Opportunity cost is defined strictly as the real cost or next best alternative sacrificed when a choice is made.

Key Concept

Scale of Preference and Opportunity Cost
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Topics

Scale of Preference

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