In the context of scarcity and choice, what is the opportunity cost of making an investment?

• A. The accounting profit earned from the investment after subtracting explicit costs
• B. The total amount of money invested plus any interest paid on borrowed funds
• C. The risk that the investment will lose value due to unpredictable market changes
• D. The value of the next best alternative use of the resources (time, money, or effort) devoted to the investment

Answer: (D)

Verified step by step guidance

1. Understand the concept of opportunity cost: it represents the value of the next best alternative that must be forgone when a choice is made.
2. Identify the resources involved in making the investment, such as time, money, and effort.
3. Recognize that the opportunity cost is not just the explicit monetary costs or accounting profit, but the value of what you give up by not using those resources in the next best alternative.
4. Formally express opportunity cost as: \(\text{Opportunity Cost} = \text{Value of Next Best Alternative}\), which includes both explicit and implicit costs.
5. Apply this understanding to the investment decision by comparing the investment's expected returns to the returns from the next best alternative use of the same resources.