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JAMB Economics 1989 Question 8

Question 8

Basic Concepts

Given perfect competition in the capital market, the opportunity cost of capital is adequately reflected by the

  1. A.interest rate
  2. B.returns on capital
  3. C.alternative capital foregone
  4. D.shadow price of foreign exchange.
Show the answer and explanation

Answer: A (interest rate)

Explanation

In a perfect capital market anyone can lend or borrow at the market interest rate, so using capital means giving up that interest. The interest rate therefore measures its opportunity cost.