Which term describes a decision scenario where choosing one option requires giving up another, a fundamental concept in resource allocation?

• A. Sunk cost
• B. Net present value
• C. Opportunity cost
• D. Variable cost

Answer: (C)

Opportunity cost is the value of the next best alternative foregone when a choice is made. In resource allocation, scarce resources mean that selecting one option means giving up other possible uses of those resources. For example, if a business spends its budget on expanding production, the opportunity cost is what those funds could have earned if used for a different project or kept for other priorities. Sunk cost refers to money already spent that cannot be recovered, so it shouldn’t drive current decisions. Net present value measures whether an investment adds value by comparing the present value of cash flows, but it doesn’t describe the trade-off between competing options. Variable cost describes costs that change with output, not the choice between alternatives. So the correct concept is opportunity cost.