Theory of Production and CostPYQ - Jan 2021Question 47 of 20

Opportunity cost is:

Options

ADirect cost

BTotal cost

CAccounting cost

DCost of next best alternative foregone

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Correct Answer

✅ Option d — Cost of next best alternative foregone

All Options:

ADirect cost
BTotal cost
CAccounting cost
DCost of next best alternative foregone

Detailed Solution & Explanation

To understand the concept of opportunity cost, let's break it down: • Opportunity cost is a fundamental concept in economics that refers to the value of the next best alternative that is given up when a choice is made. • It is the cost of choosing one option over another, and it is a key concept in decision-making. • The opportunity cost of a particular action is the benefit that could have been obtained if a different choice had been made. The correct answer is the cost of the next best alternative foregone because it accurately reflects the definition of opportunity cost, which is based on the principle of scarcity and the idea that every choice has a trade-off. Some options are incorrect because they refer to different concepts, such as direct cost or accounting cost, which are related to financial accounting and do not capture the idea of a foregone alternative. For example, direct cost refers to the cost of producing a good or service, and it does not take into account the value of the next best alternative that is given up.

About This Chapter: Theory of Production and Cost

Paper

Paper 4: Business Economics

Weightage

10%

Key Topics

Function, Cost Concepts (Short/Long Run)

This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.

View Official ICAI Syllabus

Exam Strategy Tip

The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.

Key Concepts to Understand