<span>Opportunity cost concept is very important to the view of costs of economists. It is defined as the worth or value of a forgone activity or alternative when another item is chosen. It is a relative cost of one alternative in terms of the next best alternative. It is a vital economic concept which finds application a wide range of business decisions. Decision –making is usually overlooked by opportunity cost. Opportunity costs should often subjectively estimated by decision-makers. </span>
Answer:
Option (A) is correct.
Explanation:
If it contracts with a private firm, for 1st contract,
profit = [(2 × 0.25) + (1 × 0.4) - (1 × 0.35)]
= 0.55 million dollars
If it contracts with the government, or second contract
,
profit = ($4 × 0.4) - ($2.5 × 0.6)
= 0.1 million dollars
Therefore, it is clear from the above calculations that the contract with a private will offer more profit as compared to the contract with the government.
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