Day: August 13, 2021

Alex started his own business, Alex Landscapes Gardening.  Alex was previously an employee of another business. 

What was the opportunity cost for Alex when he started his business?

Select ONE answer:

1. Cost of marketing to attract customers
2. Loss of earnings from employment
3. Payment of taxes on profits
4. Risk of business failure

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct – any marketing costs are a cost to the business and not the next best alternative for Alex.
2. Correct – Definition: opportunity cost is the cost of the next best alternative foregone.  Alex had to choose between being self-employed or receiving an income from paid employment. The result is the sacrifice of a regular secure income for the potential of higher income he might generate from self- employment.
3. Not correct – paying taxes on profits is a legal requirement for businesses and not an alternative option.  As an employee Alex paid income tax, which as a sole trader he will now have to pay on his profits so is not an opportunity cost.
4. Not correct – risking business failure is a characteristic of an entrepreneur not the opportunity forgone to run your own business.  Risk of business failure only occurs after the business is up and running and is not an opportunity cost of starting a business.

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