Answer to Question #228692 in Microeconomics for Graylin Lapi

Question

a)     An auto-parts company of Australia wants to establish a plant outside Australia. The alternatives are Fiji, PNG, Samoa and NZ. Given its financial situation, the company is constrained to set up only one plant outside Australia. Assume that the setting-up costs and the operating costs of a plant in any of these four countries are the same. The marketing research department offers a projection that if the plant is set up in Fiji, PNG, Samoa or NZ, it will fetch a turnover (revenue) of $2.5 million, $2 million, $2.3 million and $2.8 million respectively. Of course, given these choices the company will opt to set up a plant in NZ. What is then its opportunity cost?

 

Answer 1

The value of opportunity cost = value of the next best opportunity.

= $ 2.8 million