Opportunity Costs

question 3

Multiple Choice

Opportunity costs:

• A) are irrelevant.
• B) should be considered when determining an investment's relevant cash flows.
• C) are equal to the firm's sunk costs.
• D) all of the above.

---

Definitions:

Risk Premium

The extra return or profit that an investor requires to hold riskier assets, over and above that of a risk-free asset.

Utility Function

A mathematical representation that shows the relationship between an individual’s consumption bundle and their level of satisfaction or utility.

Flood Insurance

A policy that covers property damage and loss caused by flooding.

Utility Function

A utility function represents a consumer's preference for a set of goods and services, showing satisfaction levels for different consumption bundles.