Question

Which of the following should be included in the analysis when making a decision?

a.) Opportunity Costs
b.) Future costs that do not differ between alternatives
c.) Avoidable Costs
d.) Differential Costs
e.) Relevant Costs f.) Sunk Costs

Answer 1

In decision-making, include opportunity, avoidable, differential, and relevant costs in the analysis. Do not include future costs that do not differ between alternatives or sunk costs.

Step-by-step explanation:

When making a decision, the analysis should include opportunity costs, which are the benefits you forego by choosing one alternative over another. It's also important to consider avoidable costs and differential costs, which are the differences in costs between two choices. Additionally, relevant costs, which will be impacted by the decision, should be taken into account. Future costs that do not change between alternatives are not relevant to the decision process and should not be included. Sunk costs, the expenses already incurred and irreversible, should also be excluded from the analysis, as the budget constraint framework states they do not impact future decisions.

Identifying the opportunity cost is crucial as it represents the value of the best alternative forgone in a decision-making process. For instance, if choosing between several activities on a Friday night, the opportunity cost is the value of the most preferred alternative you gave up to pursue your decision. Monetary price might not accurately represent opportunity costs, especially when time is a factor, hence it's important to assess them specifically.