The Opportunity Cost of Making a Component Part in a Factory

question 54

Multiple Choice

The opportunity cost of making a component part in a factory with no excess capacity is the:

• A) variable manufacturing cost of the component.
• B) fixed manufacturing cost of the component.
• C) cost of the production given up in order to manufacture the component.
• D) net benefit foregone from the best alternative use of the capacity required.

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Definitions:

Risk-Free Asset

An investment with a guaranteed return and no risk of default, often represented by government bonds from stable governments.

Strike Price

The predetermined price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying security or commodity.

Call

An option contract that gives the holder the right to purchase a stock, commodity, or other assets at a specified price within a specific time period.

Intrinsic Value

The fundamental value of a company, stock, currency, or product determined through financial analysis without reference to its market value.