Multiple Choice
Which statement best explains the tradeoff between today's consumption and future consumption?
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0. Basic Principles of Economics
Scarcity and Choice
Multiple Choice
In the context of scarcity and choice, what is the opportunity cost of an investment?
A
The risk associated with the investment
B
The total amount of money spent on the investment
C
The expected profit generated by the investment
D
The value of the next best alternative forgone when the investment is made
Verified step by step guidance1
Understand the concept of opportunity cost: it refers to the value of the next best alternative that must be given up when a choice is made.
In the context of an investment, identify what alternatives are available besides the chosen investment option.
Recognize that the opportunity cost is not the risk, total money spent, or expected profit, but rather what you sacrifice by not choosing the next best alternative.
Formally define opportunity cost as: \(\text{Opportunity Cost} = \text{Value of Next Best Alternative Forgone}\).
Apply this definition to the investment scenario to conclude that the opportunity cost is the value of the next best alternative that is forgone when the investment is made.
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