Question

Louis Vuitton decides to invest $80,000,000 into a shoe factory in Milan from its money market account. The money market account was earning 1% in interest per year or $800,000. Louis Vuitton could have also earned $200,000 from investing the $80,000,000 in a handbag factory. What is its opportunity cost for Louis Vuitton based off of the information in presented this situation?
a. $200,000
b. $1,000,000
c. $80,000,000
d. $800,000

Answer 1

Answer:

d. $800,000

Explanation:

In opportunity cost parlance, we talk about the cost/benefit forgone of the next best alternative, not for all alternatives forgone.

The benefit forgone of the next best alternative is the $800,000 that could have been earned if the funds have been invested in the money market account, in other words, $800,000.