Arizona State University (ASU) Fin300 Fundamentals of Finance Final Practice Exam

Opportunity cost is best defined as the benefit lost by choosing one alternative over another. This concept highlights the trade-offs involved in decision-making, particularly in finance and economics. When you make a choice to pursue one option, you forego the potential benefits that could have come from an alternative option. For instance, if you decide to invest in stocks instead of bonds, the opportunity cost would be the returns you could have earned from the bonds had you chosen that investment.

Understanding opportunity cost is essential for making informed financial decisions because it encourages individuals and businesses to consider not just the explicit costs of a decision, but also what they are giving up in terms of other possible benefits. This approach allows for a more comprehensive evaluation of the potential outcomes of different choices.