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Questions and Answers
What is the opportunity cost of an action?
What is the opportunity cost of an action?
A subjective valuation that can be determined only by the individual who chooses the action.
How can the opportunity cost be determined?
How can the opportunity cost be determined?
By considering both the benefits that flow from the action as well as the monetary costs incurred.
What does it mean to determine the cost of an action?
What does it mean to determine the cost of an action?
To add up the bills incurred as a result of the action.
What type of valuation does the opportunity cost represent?
What type of valuation does the opportunity cost represent?
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Study Notes
Opportunity Cost
- Defined as a subjective valuation that varies based on individual choices.
- Represents what is given up when one alternative is selected over another.
Cost-Benefit Analysis
- Involves evaluating both the benefits gained and the monetary costs incurred from an action.
- Helps in making informed decisions by weighing potential gains against expenses.
Monetary Costs
- Determined by calculating all expenses or bills associated with a chosen action.
- Provides a clear financial picture of the costs involved.
Subjective Valuation
- Highlights that opportunity costs and decisions are influenced by personal preferences and circumstances.
- Reinforces the idea that economic decisions are unique to each individual’s situation.
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