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Quizzes > Business & Finance > Finance & Economics

How Well Do You Know Opportunity Cost? Take the Quiz!

Ready to tackle opportunity cost practice problems and sample questions? Start the test now!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
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This Opportunity Cost Questions Quiz helps you practice spotting trade-offs and the value of what you give up in everyday and exam-style scenarios. Whether you're brushing up on scarcity basics or prepping for your macro exam , you'll get instant feedback and plain-English explanations to check gaps fast and learn as you go.

What does the term opportunity cost refer to in economics?
The value of the next best alternative foregone.
A sunk cost that has already been incurred.
The monetary expense of a decision.
The total sum of all benefits received.
Opportunity cost is defined as the value of the next best alternative that must be forgone to undertake an action. It differs from sunk costs because those are costs already incurred and irrelevant to current decisions. Understanding this concept helps clarify that every choice has trade-offs based on foregone benefits.
If you spend $15 on lunch instead of saving that money, what is your opportunity cost?
The calories consumed.
The happiness from eating.
The $15 plus any interest it could have earned in savings.
The taste of your meal.
Spending $15 on lunch means you forgo putting that $15 into savings where it could earn interest. The opportunity cost includes both the principal and any interest it could generate. It captures the benefit from the next best alternative, which in this case is saving money.
If you choose to watch a movie instead of studying for an exam, your opportunity cost is:
The price of the movie ticket.
The time you could have spent studying and the exam score you might have achieved.
The cost of transportation to the theater.
The enjoyment from the movie.
By watching a movie, you give up the time that could have been used to study, potentially lowering your exam score. The opportunity cost is the benefit of the study time, not the price of the ticket. Recognizing non-monetary trade-offs is vital in measuring true costs.
Which of the following best illustrates opportunity cost?
A company purchasing new equipment and ignoring maintenance costs.
A firm writing off bad debts.
A shopper returning a product for a refund.
A student choosing to attend college instead of entering the workforce, giving up current earnings.
The choice to attend college instead of working clearly shows the foregone earnings as the next best alternative. That foregone income represents the opportunity cost. Other options either involve accounting treatments or refunds, not trade-offs between alternatives.
A farmer can plant either corn or wheat on a plot of land. If the farmer expects to earn $300 from corn and $200 from wheat, what is the opportunity cost of planting wheat?
$200
$300
$0
$100
By planting wheat, the farmer forgoes the $300 profit that could have been earned from planting corn. Therefore, the opportunity cost is the difference between the forgone corn earnings ($300) and the chosen wheat earnings ($200), which is $100. This illustrates how opportunity cost measures the value of the next best alternative.
On a production possibilities frontier (PPF), moving from point A to point B decreases output of Good Y from 80 to 60 and increases output of Good X from 0 to 10. What is the opportunity cost of each additional unit of Good X?
8 units of Good Y
2 units of Good Y
0.25 units of Good Y
20 units of Good Y
The economy sacrifices 20 units of Good Y to gain 10 units of Good X, so each additional unit of X costs 20/10 = 2 units of Y. That ratio is the opportunity cost per unit of Good X. This calculation stems directly from the PPF trade-off.
If Tom can produce either 4 cars or 2 computers, and Jerry can produce either 3 cars or 3 computers, who has the comparative advantage in producing cars?
Neither has comparative advantage.
Both have the same comparative advantage.
Tom has comparative advantage in cars.
Jerry has comparative advantage in cars.
Tom's opportunity cost of producing one car is 0.5 computers (2/4), while Jerry's is 1 computer (3/3). Since Tom gives up fewer computers per car, he has the comparative advantage in car production. Comparative advantage compares opportunity costs, not absolute output.
Which of the following costs is included in economic cost but not in accounting cost?
Opportunity cost of owner's time.
Depreciation expense.
Wages paid to employees.
Interest paid on loans.
Economic cost includes both explicit costs (like wages and interest) and implicit costs such as the opportunity cost of the owner's time. Accounting cost only includes explicit monetary expenses recorded in financial statements. Implicit costs represent the value of resources in their next-best use.
Sunk costs are best described as costs that:
Affect future decisions because they are recoverable.
Are already incurred and cannot be recovered.
Fluctuate with production levels.
Represent the highest valued alternative foregone.
Sunk costs have already been incurred and cannot be recouped, so they should not influence future decision-making. Opportunity cost, by contrast, is relevant because it involves benefits foregone by choosing one alternative over another. Rational decision-making ignores sunk costs.
When a government allocates funds to build highways instead of schools, the opportunity cost is:
The difference in construction prices.
The total cost of the highways.
The interest rate on borrowed funds.
The benefits that would have been gained from the schools.
By choosing highways over schools, the government forgoes the educational and social benefits that funding schools could provide. That foregone value constitutes the opportunity cost. It highlights the trade-off in public policy spending.
On a bowed-out PPF curve, the marginal opportunity cost of producing Good X increases because:
Resources are less efficient when reallocated from one good to another.
Resources are perfectly adaptable to both goods.
Technology improves over time.
There's unlimited availability of resources.
A bowed-out PPF reflects increasing opportunity costs because resources are not equally efficient in all uses. When you shift resources to produce more of Good X, you reallocate them from producing Good Y, where they may have been better suited. This inefficiency drives up the marginal cost.
The opportunity cost of holding cash balances in an economy is best measured by:
Nominal interest rate on loans.
The inflation rate.
The transaction costs of making purchases.
The real interest rate that could be earned by investing the cash.
Holding cash means forgoing the real return that could have been earned by investing those funds. The real interest rate adjusts nominal rates for inflation to measure true purchasing-power gains. This forgone real return is the opportunity cost of liquidity.
A firm faces a decision to invest in new machinery now or wait one year. If the firm expects a 5% return on its capital, what is the opportunity cost of waiting a year to invest?
5% of the investment's value.
The salvage value of the old machinery.
Zero, because the machinery cost doesn't change.
The depreciation expense.
Waiting one year causes the firm to forgo the 5% return it could have earned by investing immediately. That foregone return on capital is the opportunity cost of the delay. It highlights the time value of money in investment decisions.
A country deciding between funding renewable energy research or expanding its highway system faces opportunity cost measured as:
The economic and environmental benefits forgone from renewable energy advancements.
The total budget allocated.
The monetary cost of research grants.
The construction costs of highways.
By diverting funds to highways, the country sacrifices the future economic and environmental gains that renewable energy research could provide. That foregone potential is the opportunity cost. It underscores that every policy choice has alternative benefits left unrealized.
Which statement correctly distinguishes marginal opportunity cost from average opportunity cost?
Marginal opportunity cost is the cost of producing one more unit, average is the cost per unit over all units produced.
They are identical in all production processes.
Average opportunity cost increases with production, marginal always remains constant.
Marginal opportunity cost is the cost of all units produced, average is cost of one additional unit.
Marginal opportunity cost measures what is sacrificed to produce one additional unit, while average opportunity cost spreads total forgone output over all units produced. They can differ, especially when costs change with scale. Distinguishing them is key for efficient resource allocation.
Suppose a PPF is defined by the function Y = 100 - X². What is the marginal opportunity cost of producing the 5th unit of Good X?
25 units of Good Y
5 units of Good Y
20 units of Good Y
10 units of Good Y
The marginal opportunity cost is the absolute value of dY/dX at X=5. With Y = 100 - X², dY/dX = - 2X, so at X=5 it is - 10, meaning 10 units of Y are foregone. This calculus approach captures changing trade-offs on a non-linear PPF.
A company must choose between two mutually exclusive projects. Project A yields an internal rate of return of 12%, and Project B yields an internal rate of return of 10%. If the company's weighted average cost of capital (WACC) is 8%, what is the opportunity cost of choosing Project A over Project B?
10%
8%
2%
12%
Opportunity cost is the return foregone by not selecting the next best alternative. Here, choosing Project A means forgoing the 10% return from Project B. The company's cost of capital is relevant for project appraisal but not the next-best alternative's opportunity cost.
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Study Outcomes

  1. Understand Core Opportunity Cost Concepts -

    Define opportunity cost and explain why it is essential for evaluating alternative choices in economics.

  2. Calculate Opportunity Costs in Practice Problems -

    Use given data to compute opportunity costs for different scenarios and solidify your analytical skills.

  3. Analyze Trade-Offs in Decision Making -

    Compare benefits and costs of competing options to determine which choices yield the highest value.

  4. Evaluate Sample Opportunity Cost Questions -

    Work through opportunity cost sample problems to recognize patterns and avoid common mistakes.

  5. Apply Opportunity Cost Reasoning to Real-World Scenarios -

    Transfer quiz insights to everyday decisions, improving your ability to assess the true cost of your choices.

  6. Enhance Confidence in Economics Skills -

    Build fluency with opportunity cost questions and practice problems to boost your economic intuition.

Cheat Sheet

  1. Defining Opportunity Cost -

    Opportunity cost is the value of the next best alternative you give up when making a decision, a cornerstone concept in economics (Mankiw, 2018). Use the simple formula: Opportunity Cost = Benefit of Next Best Alternative Foregone. A handy mnemonic is "next best lost" to remember you always consider what you've sacrificed.

  2. Calculating with Sample Problems -

    Work through sample problems like choosing between studying or a part-time job to practice opportunity cost calculations. For example, if a student earns $15 per hour working, then the opportunity cost of studying for one more hour is $15 in forgone wages. Consistent practice with opportunity cost practice problems from sites like Khan Academy or university problem sets sharpens your skills.

  3. Applying the Production Possibility Frontier (PPF) -

    The PPF graphically shows trade-offs between two goods, with its slope representing the opportunity cost of one good in terms of the other. Shifting resources from "butter" to "guns" on a classic PPF example reveals that producing each extra unit of one good costs you units of the other. Understanding PPF curvature helps answer more advanced opportunity cost questions under scarce resources.

  4. Marginal Analysis and Opportunity Cost -

    Marginal analysis compares the additional benefit of one more unit against its opportunity cost, guiding optimal choice. For instance, a firm will expand production only if the marginal revenue exceeds the marginal cost, including the value of foregone alternatives. Mastering marginal decision rules is key for tougher opportunity cost problems in microeconomics.

  5. Avoiding the Sunk Cost Fallacy -

    Sunk costs are past expenditures that should not factor into future decisions, since they cannot be recovered. Real-world opportunity cost sample problems often test your ability to ignore sunk costs and focus on incremental benefits instead. Remember: "Don't throw good money after bad" - focus only on future costs and returns.

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