Answer
a. Opportunity cost is the cost of the loss of other alternatives when a particular alternative is chosen. It refers to the benefits that could have been received, but gave up to select another course of action.
b. My aunt shouldn't open the store. The profit or income she would potentially earn from her store would be her revenue - her costs, ie. 510,000 dollars - 500,000 dollars = 10,000 dollars per year. Which is pretty measly, compared to her current annual income of 50,000 dollars a year as an accountant. So, even though she would make a profit of 10,000 dollars, she would lose out on her income of 40,000 additional dollars that she would make as an accountant. Hence, it is wiser for her to stay in her current job.
Work Step by Step
Opportunity cost, as we now know, is the amount foregone while choosing a particular course of action.
Let's take the example of a student, such as yourself, and compare your situation with a firm.
Just as you have limited number of hours per day, the firm too has access to scarce resources.
Just as it is up to you to decide how you make the most of your day, the firm too makes certain decisions relating to the allocation of its factors of production, and what it should actually manufacture.
If you decide to study economics on Gradesaver for the next two hours, you forego the benefit of hanging out at the mall, or watching a movie, or sleeping. Similarly, if a firm decides to produce mobile phones, it gives up the opportunity of manufacturing televisions or aeroplane engines.
However, just as you have decided that these next two hours on Gradesaver are the most productive use of your time, the firm too decides that producing mobile phones are most profitable, and thus foregoes the potential income it would have earned had it produced televisions or aeroplane engines.
Similarly, the most profitable choice for my aunt would be to continue working as an accountant - that is if her motive is to make the most money. However, if she's really passionate about opening a hardware store, she should go ahead and do just that!
