Economics 9708/12 — February/March 2021

Background Concept

Opportunity cost is the value of the next best alternative foregone when a choice is made. It arises because resources are scarce and cannot satisfy all wants. Every choice involves giving up the next best opportunity, and the cost of the choice is measured by that forgone opportunity, not by the sum of all forgone alternatives.

Understanding the Question

This is a multiple-choice question testing the definition of opportunity cost. The question presents a preference order for four holiday destinations, all at the same price. The family chooses Barcelona (1st preference). The question asks: what is the opportunity cost of this choice? The options include the other destinations individually or in combination. The key is to identify the next best alternative, which is the second preference.

Approach

Start by recalling the definition of opportunity cost. Then examine the preference order: Barcelona is 1st, Paris is 2nd, London and Venice are tied for 3rd. The next best alternative after Barcelona is Paris, because it is the second preference. The monetary cost is the same for all, so it does not affect the opportunity cost. Therefore, the opportunity cost is Paris. Eliminate the other options: A is the chosen option itself, B includes two alternatives that are not the next best, D includes all foregone alternatives (which is incorrect).

Step-by-Step Reasoning

1. The family's preferences are ranked: 1st Barcelona, 2nd Paris, =3rd London and Venice.
2. Opportunity cost is defined as the value of the next best alternative foregone.
3. The next best alternative is the one that would have been chosen if Barcelona were not available. According to the ranking, that is Paris (2nd choice).
4. London and Venice are tied for third, meaning they are less preferred than Paris. They are not the next best alternative, so they are not part of the opportunity cost.
5. Option C (Paris) is correct. Option A (Barcelona) is the chosen option, not the cost. Option B (London and Venice) includes two alternatives but not the next best. Option D (London, Paris, and Venice) includes all foregone alternatives, which is a common misconception.

Key Takeaways

• Opportunity cost is always the next best alternative, not the sum of all alternatives.
• When preferences are given, identify the rank of the chosen option and then the next highest ranking alternative.
• Opportunity cost is measured in terms of foregone satisfaction or value, not necessarily monetary cost.

Common Mistakes

• Choosing all foregone alternatives (option D) because the student thinks everything given up is a cost. This is incorrect; only the best foregone alternative counts.
• Choosing the chosen option itself (option A) because of confusion between cost and choice.
• Including tied third choices (option B) as if they are the next best, but they are not the second preference.

Things to Be Careful About

• The phrase "next best alternative" means the best of the options not chosen, not every option not chosen.
• If two alternatives are tied for second, the opportunity cost is still the single next best alternative (or one of them if they are equally valued, but here the ranking is clear: Paris is second).
• The monetary cost being the same for all destinations makes it irrelevant to the opportunity cost calculation; the cost is the foregone satisfaction from the next best destination.