Answer to Question #125777 in Economics of Enterprise for aaa

Question

Your parents gave you 200 KD. You have a choice between spending the money now or investing your money and buy shares of a company. You will receive 20 KD as a dividend after one year.

a) What is the opportunity cost of spending 200 KD now? (10 points)

b) Based on your understanding define opportunity cost. Justify your answer with an example. (20 points)

Answer 1

a)

$$200+20=220$$

Since dividends in the amount of 20 are possible when buying shares, at the current moment they should be taken into account as a possible benefit.

b)

The opportunity cost is the value of the best of the discarded options, while the cost of the selected option is the smallest possible. In business, this is income that could be obtained by making another decision. Actual lost profits.

Ex.:A flower girl can sow her limited plot of land either with daffodils, or roses, or both.

A plot of land occupied by one rose bush can be used for planting two daffodils. Consequently, the opportunity cost of one rose bush equals two bulbs of daffodils.

Possible options for planting flowers are presented on the chart.