The correct answer is B. opportunity cost.
Opportunity cost is the economic term for the thought process Katie is going through when considering the alternatives, she would have to give up if she decides to spend her savings on buying a car. It refers to the value of the next best alternative that is forgone when making a decision.
In this case, the opportunity cost for Katie would be the other possible uses of her savings, such as investing in stocks, starting a business, or saving for a future goal. By choosing to spend her savings on a car, she is giving up the opportunity to use that money for other purposes.
To further illustrate, let's say Katie's savings amount to $10,000. If she decides to buy a car for $8,000, the opportunity cost would be the potential uses of the remaining $2,000. She could have used that money to invest in a stock that might have gained value over time or used it to start a small business. By choosing to spend it on a car, she is forgoing these other opportunities.
Understanding opportunity cost is essential in economics because it helps individuals and businesses make informed decisions by weighing the benefits and drawbacks of different alternatives. It encourages us to consider the value of what is given up in order to make the best possible choice.
I hope this helps you. :)