What is the formula for Opportunity Cost?

Opportunity cost refers to the value of the next best alternative that is foregone when a choice is made. In economic terms, it quantifies what you give up in order to pursue a certain action or decision, typically measured in terms of the benefits associated with that alternative.

The correct choice highlights that opportunity cost is calculated by considering the number of units given up multiplied by their price. This emphasizes that when you choose to allocate resources (such as time, money, or effort) towards one option, the cost is not just the monetary expense but also includes the potential earnings or value derived from the alternative that was not chosen.

For instance, if an individual decides to invest time in studying for a degree instead of working, the opportunity cost includes the income that could have been earned during that time, which can be expressed in terms of the units of work (such as hours) declined and the wage rate per hour.

This understanding of opportunity cost is crucial in economics, as it helps individuals and businesses to make more informed decisions by weighing the potential benefits and costs of different choices.