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Opportunity Cost

In many situations, choosing a specific alternative means that other alternatives can not be chosen. These foregone alternatives are opportunities lost. Opportunity cost is the benefit foregone (given up) by choosing one opportunity rather than another with a higher short run payoff.

For example, attending college includes direct and opportunity costs. Assume tuition is $30,000 for one year and that you are foregoing a $40,000 salary that you could have been earning. The opportunity cost is $40,000 and so the real cost of attending college is $70,000.

Assessing opportunity costs is necessary to evaluate the true cost of a course of action.




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