Define opportunity cost and give an example.

• A. Opportunity cost is the price paid to purchase a good.
• B. Opportunity cost is the total amount spent in a decision including taxes.
• C. Opportunity cost is the value of the next best alternative forgone when making a choice; e.g., choosing to spend time on a job rather than studying leads to lost wage or future income.
• D. Opportunity cost is the time wasted on non-work activities.

Answer: (C)

Opportunity cost is the value of the next best alternative you give up when you make a choice. It isn’t just the money you spend on something, or the time you waste, but the potential benefit you forgo by not selecting the alternative that could have produced the next best payoff.

For example, if you spend time working a job instead of studying, the opportunity cost is the wages you could have earned from the job plus any future income tied to the extra knowledge or credentials you would have gained by studying. So the cost isn’t just the hours or the money spent now; it’s what you miss out on by not choosing the other option.

Other options miss the idea of forgone alternatives. Describing price paid or total spending focuses on outlays, not on what could have been earned or enjoyed if a different path had been chosen. Describing time wasted on non-work activities also misses that the essential point is the value of the best alternative that wasn’t pursued. The key idea is the value of the next best choice you forgo.