Question

1.) Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?

Answer 1

Opportunity cost refers to the loss of other alternatives when one alternative is chosen. In the decision of purchasing a new car, the person should consider the opportunity cost of purchasing a new car. This refers to how the money that is currently utilized for buying a car can be used. For instance, the person can invest the money and in this case the rate of interest received on the money invested is the opportunity cost of buying a car. The person should compare the benefit of buying the car with the rate of interest or any other alternative in which the money can be used and if the benefit from purchasing the car is higher, then the person should purchase car otherwise should not purchase the car.