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Demand and Supply of Foreign Exchange

Your friend's...

Question

Your friend's and your birthday is on the same day. On the occasion, both of you exchange gifts. Each of you spends $R s . 400$ . You spend this amount by borrowing for which you are to pay $R s . 20$ as interest. What is your opportunity cost of celebrating birthday?

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Solution

Opportunity cost of production of a commodity refers to the cost which the producer has to sacrifice in terms of the next best alternative which could be produced out of that cost in order to produce every unit of the given commodity. Therefore, the opportunity cost for celebrating birthday will be the total amount spent on the birthday occasion which is 400+20= 420 rupees.

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