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What is Opportunity Cost? Explain with the Help of a Numerical Example. - Economics

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What is opportunity cost? Explain with the help of a numerical example.

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Solution

Opportunity cost refers to the value of a factor in its next best alternative use. Assuming that resources and technology remain constant, an economy is producing Good X and Good Y. Different combinations of production of Good X and Good Y are given in the production possibilities schedule:

Production Possibilities Good X Good Y

`MOC=(DeltaY)/(DeltaX)`

I 0 30 -
II 1 27 -3
III 2 21 -6
IV 3 12 -9
V 4 0 -12

 

At the production point II, 1 unit of Good X and 27 units of Good Y are produced. To produce an additional unit of Good X, 3 units of Good Y must be sacrificed.

Here, the opportunity cost is

Opportunitycost from ItoII `(DeltaY)/(DeltaX)="Amount of good Ysacrifed"/"Amount of good Xgained"=(27-30)/(2-1)=-3`

Thus, the opportunity cost of getting an additional unit of Good X is 3 units of Good Y.

Concept: Concept of Opportunity Cost
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