Suppose an agricultural labourer earns ₹400 per day in her village. She gets a job to work as babysitter in a nearby town @ ₹700 per day. She chose to work as agricultural labourer. Which one of the following is the opportunity cost of the agricultural labourer?
- (a)₹1,100
- (b)₹700
- (c)₹400
- (d)₹300
Correct — B, ₹700. Opportunity cost is the value of the next best alternative given up when a choice is made, and it is measured by what you did not take, never by what you took. This worker had two options and chose one. By working in her village for ₹400 a day she gave up the babysitting job in town that would have paid ₹700 a day, so the opportunity cost of the choice she made is ₹700 — the whole value of the alternative forgone, not the difference between the two. The ₹300 gap is the net loss of income from her decision, which is a different quantity and the trap the option set is built around.
- (a)₹1,100 — Adds the two earnings together. That would only make sense if she could have had both, which is exactly what a choice rules out — the two jobs are alternatives, and adding them double-counts.
- (c)₹400 — What she actually earns, which is the benefit of the chosen option rather than the cost of choosing it. If the option taken were also the opportunity cost, every choice would cost exactly what it gains.
- (d)₹300 — The difference between the two wages, and the most attractive wrong answer. It measures how much worse off she is in money terms, but opportunity cost is defined as the value of the forgone alternative in full, not the net shortfall.
Every economic choice made under scarcity has an opportunity cost, because resources committed to one use cannot be committed to another. The measure is the value of the next best alternative forgone — next best, so only one alternative counts even when several were available. Opportunity cost is therefore a real cost even where no money changes hands, which is what separates it from the accounting cost recorded in the books.
The reliable method is to name the alternative before doing any arithmetic. Ask what was given up, value it, and stop — no subtraction, no addition. Two extensions of the idea are commonly tested. In production, opportunity cost is what gives the production possibility curve its shape, because more of one good means less of another. In public finance, a good supplied free to the public still carries an opportunity cost; it does not disappear, it is shifted onto the taxpaying public who fund it. One note on the printing: the stem asks for 'the opportunity cost of the agricultural labourer', where what is meant is the opportunity cost of her choosing to work as an agricultural labourer. The loose phrasing does not change the calculation.
- Opportunity cost is the value of the next best alternative forgone when a choice is made.
- It is measured by the alternative given up in full, not by the difference between the alternatives.
- It applies even where no money is paid, which distinguishes it from accounting cost.
- The shape of the production possibility curve reflects the opportunity cost of moving resources between goods.
- A commodity supplied free by the government still has an opportunity cost; it is borne by the taxpaying public.
- Taking the difference between the two options instead of the full value of the one given up.
- Adding the alternatives together, which assumes both could be had at once.
- Treating the chosen option's earnings as the opportunity cost.
As a small numerical scenario with two alternatives, or as a definition item asking what opportunity cost measures.
If a commodity is provided free to the public by the Government, then
- (a) the opportunity cost is zero.
- (b) the opportunity cost is ignored.
- (c) the opportunity cost is transferred from the consumers of the product to the tax-paying public.
- (d) the opportunity cost is transferred from the consumers of the product to the Government.
Answer(c) the opportunity cost is transferred from the consumers of the product to the tax-paying public.
The same idea moved from an individual choice to a public one. Resources used for a free good could have gone elsewhere, so the cost does not vanish — it shifts to whoever pays for it, which is the taxpaying public.
Which one of the following is the opportunity cost of a chosen activity?
- (a) Out of pocket cost
- (b) Out of pocket cost plus cost incurred by the Government
- (c) Value of all opportunities forgone
- (d) Value of next best alternative that is given up
Answer(d) Value of next best alternative that is given up
The definition behind the arithmetic, asked a year later. Its option about the value of all opportunities forgone is the other standing error — only the next best alternative counts, not the sum of every option.
- practice — not a real PYQ
A student gives up a job paying ₹20,000 a month to study full time, and pays ₹5,000 a month as fees. The opportunity cost of a month of study is
- (a)₹5,000
- (b)₹15,000
- (c)₹20,000
- (d)₹25,000
Answer(d) ₹25,000 — the forgone salary of ₹20,000 plus the ₹5,000 actually spent, since both resources could have been put to their next best use.
- practice — not a real PYQ
The shape of the production possibility curve, bowed outward from the origin, reflects
- (a)constant opportunity cost
- (b)increasing opportunity cost
- (c)zero opportunity cost
- (d)falling total output
Answer(b) increasing opportunity cost — as more of one good is produced, progressively larger amounts of the other must be given up.