National Evaluation Series (NES) Business Studies Practice Test

Which scenario best illustrates the concept of opportunity cost?

1. A company expands its product line after successful testing.

2. A company delays opening branch offices to invest in research and development.

3. A store increases hours to accommodate more customers.

4. A business reduces prices to attract a larger customer base.

The correct answer is: A company delays opening branch offices to invest in research and development.

Opportunity cost refers to the next best alternative that is given up when making a decision. In this scenario, when a company decides to delay opening branch offices in order to invest in research and development, it is forgoing the potential benefits and profits that could have been gained from the new branch offices. By choosing to allocate its resources (time, money, and effort) towards research and development, the company acknowledges that the potential success of the new branches is not being pursued at this time. The value of that unpursued option represents the opportunity cost, as it reflects what the company is sacrificing in order to focus on a different strategic choice. The other scenarios, while they involve strategic business decisions, do not illustrate the concept of opportunity cost as clearly. A company's expansion of its product line reflects growth strategies rather than a choice between competing options. Increasing store hours to accommodate more customers shows a demand response but does not present a clear trade-off situation. Furthermore, reducing prices to attract more customers is a pricing strategy that aims to increase sales figures rather than highlighting an alternative that is being sacrificed. Only the choice to invest in research and development directly aligns with the principle of opportunity cost by illustrating a clear decision between two distinct alternatives.