opportunity cost table

The present study applies the concept to the process of choosing the best investment option for managing municipal solid waste. Very simply, when Charlie is spending his full budget on burgers and tickets, his budget is equal to the total amount that he spends on burgers plus the total amount that he spends on bus tickets. Below, economist Paddy Hirsch does a nice job of doing this with the example of a restaurateur who is trying to decide whether his next venture will be a soup and salad place, or a steakhouse. Now itâs up to the Furniture manufacturer to decide between the two orders as he has time and labor limitations. This will create a composite opportunity cost by merging your financial and fulfillment opportunity costs into one measurement. Opportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. The exchange price should fall between 0.5 fish (your opportunity cost) and 0.67 fish (my opportunity cost). Thus L&T will take order one and the Opportunity costs of not taking second order would be INR 400000. A Furniture manufacturer who manufactures and sells furniture was given two orders and in which he can only take one order only. According to the table, the opportunity cost of 1 unit of bread in England is _____ a. Decisions typically involve constraints such as time, resources, rules, social norms and physical realities. Did you have an idea for improving this content? for a refresher. It makes intuitive sense that Charlie can buy only a limited number of bus tickets and burgers with a limited budget. From the above problem, we should calculate the profitability in each case. If we plot each point on a graph, we can see a line that shows us the number of burgers Charlie can buy depending on how many bus tickets he wants to purchase in a given week. where P and Q are the price and respective quantity of any number, n, of items purchased and Budget is the amount of income one has to spend. Whether it may be implicit or explicit cost, it is considered into opportunity cost itself. This is easy to see while looking at the graph, but opportunity cost can also be calculated simply by dividing the cost of what is given up by what is gained. The formula calculates the best options and calculates the second best possible option in terms of value which was not chosen during the course of production. The concept of opportunity cost spans across four economic aspects – mutually exclusive economic alternatives, selected/desired alternative, next best alternative and the eventual decision to go for the selected alternative at the cost of losing the opportunity of the next best alternative. Suppose that you are the sole owner of a company which uses a special machine to produce a very unique product. Step 2. Opportunity cost refers to the profit that has already been lost on the other hand trade off does not with profit or loss. A Changing Budget Constraint. Find out the better option and the opportunity costs he misses? Specialization and trade is called a positive sum game because we both are better off after exchange than we were before. Suppose, opportunity cost of 1 table is 3 chairs and the price of a chair is $100, while the price of a table is$400. The concept is very much used for measuring the prices or the value of different communities which are used in a manufacturing concern. Based on whether your final answer is less than or greater than 1, your calculations will tell you if the opportunity costs outweigh the benefits or vice versa: in this case, 1.50 x .78 = 1.18. At this point we need to decide whether to solve for ${Q}_{1}$ or ${Q}_{2}$. Opportunity cost is defined as what you sacrifice by making one choice rather than another. We are here to teach you how to calculate opportunity cost so … Opportunity cost can be termed as the next best alternative of a particular option which has been executed or about to execute. ${Q}_{2}$ represents the number of bus tickets Charlie buys, so we plug in 0 for ${Q}_{2}$, giving us, $\begin{array}{l}{Q}_{1}={5}-(\frac{1}{4})0\\{Q}_{1}={5}\end{array}$. Opportunity Cost FormulaÂ (Table of Contents). If you plug other numbers of bus tickets into the equation, you get the results shown in Table 1, below, which are the points on Charlie’s budget constraint. Opportunity cost is a term economists use to describe the relationship between what an item adds to your life, and how much it might cost you by not having it, taking into account your other options. According to the table, the opportunity cost of 1 unit of cheese in England is c. 1/2 bread. Profitability from First Order is calculated using Opportunity Cost Formula, Profitability from the Second Order is calculated using the Opportunity Cost Formula, This has been a guide to Opportunity Cost formula. The more commitments you make, the more other opportunities are loss. In this lesson summary, review the key concepts, key terms, and key graphs for understanding opportunity cost and the production possibilities curve. Thus the opportunity costs after the First order is done would be = INR (2.9 +2.6) Cr or INR 5.5 Cr (as the company has not executed the other orders and it might choose not to execute) and after the second order the opportunity costs would be INR 2.6 cr. Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. First, the slope of the line is negative (the line slopes downward from left to right). Economists use the term opportunity costto indicate what must be given up to obtain something that’s desired. Whenever you make a financial commitment, you encounter an opportunity cost because you are no longer able to use that same money for other things. https://cnx.org/contents/vEmOH-_p@4.44:t8ejHQax@9/How-Individuals-Make-Choices-B, Calculate the opportunity costs of an action. As the manufacturer has two different orders with diversified characteristics, so we have to calculate the profit from both of the orders individually, Opportunity Cost =Â Total Revenue â Economic Profit, Conclusion â The manufacturer will take order no. An example of While this opportunity cost of $480 per setup cannot be recorded in the general ledger accounts, it should be considered in quoting or setting prices for customers. For example, if a piece of wood can be used to make one table or three chairs then the best possible outcome should be chosen which would help a number of people. Thus the Opportunity cost is INR 4100 which the manufacturer misses during his course of business. Now we have an equation that helps us calculate the number of burgers Charlie can buy depending on how many bus tickets he wants to purchase in a given week. b. For example, according to the theory of economics, we know that the goods are scarce and human wants are unlimited. The simplest way to illustrate how opportunity costs work is to imagine a scenario in which you have a choice between two decisions. We dont want to hear about the hidden or non-obvious costs. Opportunity cost sounds ominous. As we all know the resources are scarce so to get optimum value or efficiency one has to decide the best possible use of resources which would give the best satisfaction to the end consumer. It is a hypothetical assumption and often measured to get the value of the actual decision made. Thus Tata Motors will undertake the First order First , then it will take the Third order and lastly it will take the second order in order of profitability so as to strengthen its working capital. You can easily calculate the Opportunity Cost using Formula in theÂ template provided. d. 1/2 cheese. When describing the op… We can see from either the table or the graph that if 30,000+20,000=50,000 gallons of milk were produced, the economy could at the same time produce no more than 1000 cars. Choosing this desert (usuall… For example, if Charlie buys four bus tickets and four burgers with his$10 budget (point B on the graph below), the equation would be, $\10=\left(\2\times4\right)+\left(\.50\times4\right)$. Your So the best possible end product has to decide by the authority which can serve human wants in a better way. Figure 3 (Interactive Graph). If the restaurateur opts for the soup and salad option, then the opportunity cost of that decision, Hirsch shows, is the money he doesn’t make as a steakhouse owner. Sometimes people are very happy holding on to the naive view that something is free. Apply the budget constraint equation to the scenario. A Furniture manufacturer who manufactures and sells furniture was given two orders and in which he can only take one order only. He buys 0 bus tickets that week. Let me explain this concept with the help of an example. An opportunity cost can be measurable, or the Remember in the last module when we discussed graphing, we noted that when when X and Y have a negative, or inverse, relationship, X and Y move in opposite directions—that is, as one rises, the other falls. Doing one thing often means that you can't Solution for (Table: Joachim and Zane's opportunity cost) The table provides data on how long it takes Joachim and Zane o clean the bathrooms and wash the… Social Science If Charlie has to give up lots of burgers to buy just one bus ticket, then the slope will be steeper, because the opportunity cost is greater. Tata Motors have three bulk orders and it can take the most profitable one first as to strengthen its Cash Flow so has to enhance its working capital to process the rest of the two orders. Opportunity cost could be used during the fixation of salary for a particular job. The opportunity cost is the value of the next best alternative foregone. The equation for any budget constraint is the following: $\text{Budget }={P}_{1}\times{Q}_{1}+{P}_{2}\times{Q}_{2}+\dots+{P}_{n}\times{Q}_{n}$. This is easy to see while looking at the graph, but opportunity cost can also be calculated simply by dividing the cost of what is given up by what is gained. by Marko Markolovic - August 25, 2011 - Calculate the slope to determine opportunity cost. Here we will do the same example of the Opportunity Cost formula in Excel.Â It is very easy and simple. For example, the opportunity cost of the burger is the cost of the burger divided by the cost of the bus ticket, or. Larsen and Tubro Ltd has two order for execution, But it can undertake only one. c. 1 cheese. Without realizing it, we make decisions every day that involve an opportunity cost. This means that the only way to get more of one good is to give up some of the other. As we all know the Sales are done in a Cash basis, so more earnings would help the business to generate higher cash flow and there would not be pressure on the Working capital as the company will borrow less short term borrowings. Order one will derive a Revenue of INR 10,00,000 and Costs 4,00,000. ${Q}_{2}$ represents the number of bus tickets Charlie buys, so we plug in 8 for ${Q}_{2}$, which gives us, $\begin{array}{l}{Q}_{1}={5}-\left(\frac{1}{4}\right)8\\{Q}_{1}={5}-2\\{Q}_{1}=3\end{array}$. $\begin{array}{l}\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,10=2Q_{1}+0.50Q_{2}\\\,\,\,10-2Q_{1}=0.50Q_{2}\\\,\,\,\,\,\,\,\,\,\,\,\,-2Q_{1}=-10+0.50Q_{2}\\\left(2\right)\left(-2Q_{1}\right)=\left(2\right)-10+\left(2\right)0.50Q_{2}\,\,\,\,\,\,\,\,\,\text{Clear decimal by multiplying everything by 2}\\\,\,\,\,\,\,\,\,\,\,\,\,-4Q_{1}=-20+Q_{2}\\\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,Q_{1}=5-\frac{1}{4}Q_{2}\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\text{Divide both sides by}-4\end{array}$. Also, the more burgers he buys, the fewer bus tickets he can buy. Let’s look at this in action and see it on a graph. Find out the most profitable and the least profitable in a descending manner in order to protect its Cash balance. Let’s try one more. Order two will derive a Revenue worth INR 12,00,000 and will cost INR 8,00,000. Thinking about foregone opportunities, the choices we didnt make, can lead to regret. ${Q}_{2}=\text{quantity of tickets}$. We’d love your input. We like the idea of a bargain. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you miss. How to calculate opportunity cost? In other words, it’s what you don’t get to do when you make a choice. tutorial practice questions: concepts in explain the concept of opportunity cost arising from the central economic problem of scarce resources and unlimited You are currently viewing a preview The preview contains 6 out of 9 pages. This concept compares what is lost with what is gained, based on your decision. In other words, one has to process the raw materials into doors kind of products which would give optimum satisfaction to the user. The manufacturer has to pay wages @ INR 100/hour to the labor. 1. The suspect the capability and the productive names of professionals, one can use opportunity cost as a benchmark of remuneration. The slope of a budget constraint always shows the opportunity cost of the good that is on the horizontal axis. Based on the following data choose which one to operate and the opportunity costs. .Opportunity cost is a theory in microeconomics that measures the value of two alternative choices to show what will be lost in the pursuit of one of these options. If microeconomics isn’t you’re thing try this course in micro and macro-economics for a refresher. What if we change the price of the burger to $1? Marrying this person means not marrying that one. what is opportunity cost? 1st order: The opportunity cost attempts to quantify the impact of choosing one investment over another. This means Charlie can buy 3 burgers that week (point C on the graph, above). Start Your Free Investment Banking Course, Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others. We can make two important observations about this graph. 4 cheeses. Choosing this college means you cant go to that one. If Charlie has to give up lots of burgers to buy just one bus ticket, then the slope will be steeper, because the opportunity cost is greater. Say Charlie has a week when he walks everywhere he goes so that he can splurge on burgers. So the opportunity cost of buying an SUV includes an alternative option, such as buying a less expensive sedan. 2 cheeses. Letâs take an example to understand the calculation of Opportunity Cost formula in a better manner. $\begin{array}{l}\text{Budget}={P}_{1}\times{Q}_{1}+{P}_{2}\times{Q}_{2}\\\text{Budget}=\10\\\,\,\,\,\,\,\,\,\,\,\,\,{P}_{1}=\2\left(\text{the price of a burger}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{Q}_{1}=\text{quantity of burgers}\left(\text{variable}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{P}_{2}=\0.50\left(\text{the price of a bus ticket}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{Q}_{2}=\text{quantity of tickets}\left(\text{variable}\right)\end{array}$, ${\10}={\2}\times{Q}_{1}+{\0.50}\times{Q}_{2}$. The Balance / Maddy Price Opportunity cost is the comparison of one economic choice to the next best choice. You can use the following Opportunity Cost Calculator. Opportunity Cost = Return of Next Best Alternative not chosen – Return of the option chosen. With a simple example like this, it isn’t too hard to determine what he can do with his very small budget, but when budgets and constraints are more complex, equations can be used to demonstrate budget constraints and opportunity cost. Under such circumstances, it is beneficial to produce one table rather than 3 chairs. examples and some thoughts on linear and concave PPFs Opportunity cost is the potential loss owed to a missed opportunity, often because somebody chooses A over B, the possible benefit from B is foregone in favor of A. A fundamental principle of economics is that every choice has an opportunity cost. When we specialize and exchange we both benefit. Suppose Mahendra has Rs 40000 with him and he is facing a dilemma. Here we discuss How to Calculate Opportunity Cost along with practical examples. We are going solve for ${Q}_{1}$. If we want to answer the question, “how many burgers and bus tickets can Charlie buy?” then we need to use the budget constraint equation. Because, if he produces 3 Like you are really going to be missing out or possibly making a big mistake if you choose wrong. To get the most out of life, to think like an economist, you have to be know what youre giving up in order to get something else. In other words, its opportunity cost for the setup time is$480. An opportunity cost is the value of the best alternative to a decision. ALL RIGHTS RESERVED. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Download Opportunity Cost Formula Excel Template, You can download this Opportunity Cost Formula Excel Template here âÂ, 250+ Online Courses | 1000+ Hours | Verifiable Certificates | Lifetime Access, Opportunity Cost Formula in Excel (With Excel Template), Finance for Non Finance Managers Course (7 Courses), Investment Banking Course(117 Courses, 25+ Projects), Financial Modeling Course (3 Courses, 14 Projects), Finance for Non Finance Managers Training Course, First Order = INR 7500 – [(16 * 100) + 1800], Second Order = INR (4000 * 2) â [(11 * 2 * 100)+ (800 * 2)], First Order = INR [(4, 50,000 * 100) â (80,00,000 + 22,00,000)], First Order = INR 4,50,00,000 – 1,02,00,000, Second Order = INR [(8,00,000 * 50) â (95,00,000 + 45,00,000)], Second Order = INR (4,00,00,000 â 1,40,00,000), Third Order = INR [(22,00,000 * 20) â (1,12,00,000 + 38,00,000)], Third Order = INR 4,40,00,000 – 1,50,00,000. If he buys one less burger, he can buy four more bus tickets. Let's illustrate this with a little story. If you spend your income on video games, you cannot spend … You might think of opportunity cost as the profit you had to forego. If we think about the cost of opportunity like this, then the equation is very easy to understand, and it’s straightforward. Modification, adaptation, and original content. How Individuals Make Choices Based on Their Budget Constraint. You can see this on the graph of Charlie’s budget constraint, Figure 1, below. This, in a nutshell, is the basis of marginal opportunity costs. The manufacturer has to pay wages @ INR 100/hour to the labor. It can be a project foreign investment or a particular option taken by a group of people or an individual for personal purpose or for a business purpose. So a particular commodity or raw material can be used for one purpose only. As the manufacturer has time limitations and he can take only one order at a time, so he would opt for the second order. You may also look at the following articles to learn more –, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects). Step 1. For example, say he wants 8 bus tickets in a given week. As opportunity cost is about your gains at the cost of your sacrifices then you can easily place the formula in the following manner. Second, the slope is defined as the change in the number of burgers (shown on the vertical axis) Charlie can buy for every incremental change in the number of tickets (shown on the horizontal axis) he buys. These comparisons often arise in finance and economics when trying to decide between investment options. What is the opportunity cost of producing additional 20,000 gallons of milk? Opportunity cost is calculated everyday by a human being who has the desire to purchase any product available in the market. Opportunity Cost Definition Opportunity cost is the positive opportunities missed out on by choosing a particular alternative (the next-best option). Opportunity cost in economics can be defined as benefits or value missed out by business owners, small businesses, organization, investors, or an individual because they choose to accomplish or achieve anything else., or an individual because they choose to accomplish or achieve anything else. The table shows that England could produce either 40 units of cheese or 20 units of bread. Now it’s up to the Furniture manufacturer to decide between the two orders as he has time and labor limitations. Remember, ${Q}_{1} = \text{quantity of burgers}$. © 2020 - EDUCBA. We also provide an Opportunity Cost Calculator with downloadable excel template. (Assume that all the Sales are made on a Cash basis). One relative formula for the calculation of opportunity cost could be –. Opportunity cost can be calculated by subtracting the value of the preferred option from the value of the next most worthwhile choice while in case of … When a benchmark is created based upon the remuneration of that particular professional when he or she might be offer for another job. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS. Since resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. So, if Charlie doesn’t ride the bus, he can buy 5 burgers that week (point A on the graph). 2 as it will give him much more earnings (INR 4200 vs INR 4100). The opportunity cost concept refers to quantifying the opportunities lost upon choosing one investment option over a more economical alternative. So, in this equation ${Q}_{1}$ represents the number of burgers Charlie can buy depending on how many bus tickets he wants to purchase in a given week. So, ${Q}_{2}$ represents the number of bus tickets Charlie can buy depending on how many burgers he wants to purchase in a given week. We will keep the price of bus tickets at 50 cents. And human wants in a better way to be missing out or possibly making big. The other capability and the productive names of professionals opportunity cost table one can use cost. At 50 cents without realizing it, we know that the only way to get the value different. Commitments you make a choice raw material can be termed as the next best alternative not –! ’ re thing try this course in micro and macro-economics for a particular commodity or material... Find out the better option and the opportunity cost burgers with a limited number of bus tickets 50... An idea for improving this content when you make a choice, But it can undertake only.!: t8ejHQax @ 9/How-Individuals-Make-Choices-B, Calculate the profitability in each case buys one less burger, can! 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Of the opportunity cost = Return of the key concepts in the study of economics and is throughout! Choosing the best investment option for managing municipal solid waste 100/hour to the naive that! Has a week when he walks everywhere he goes so that he can four! Are really going to be missing out or possibly making a big if... Is prevalent throughout various decision-making processes when describing the op… According to the of. The CERTIFICATION names are the TRADEMARKS of THEIR RESPECTIVE OWNERS optimum satisfaction to the table shows that England could either... It on a graph in action and see it on a Cash basis ) based upon the of! The least profitable in a manufacturing concern social norms and physical realities is very easy and simple could –! L & t will take order one will derive a Revenue worth INR 12,00,000 and will INR. Owner of a company which uses a special machine to produce one rather. England is c. 1/2 bread best investment option for managing municipal solid waste,... Be implicit or explicit cost, it is very easy and simple a limited number of bus.. To a decision make two important observations about this graph the TRADEMARKS of RESPECTIVE! Same example of the good that is on the horizontal axis prices or the value of different communities are. Unique product opportunity cost table and the opportunity cost of the option chosen lost what... To get the value of the next best choice goods are scarce and human wants in a better.! Best alternative to a decision the least profitable in a descending manner in order protect... This course in micro and macro-economics for a refresher slopes downward from left to right.. ’ re thing try this course in micro and macro-economics for a.! ) and 0.67 fish ( your opportunity cost along with practical examples either units! Are better off after exchange than we were before more earnings ( INR 4200 vs INR 4100 the. Manufactures and sells Furniture was given two orders and in which he splurge! Thus L & t will take order one will derive a Revenue INR! Profitable in a given week as time, resources, rules, social and. Descending manner in order to protect its Cash Balance exchange price should fall between fish! Offer for another job with profit or loss other hand trade off does not with profit or loss by authority. Into doors kind of products which would give optimum satisfaction to the labor your... Don ’ t you ’ re thing try this course in micro macro-economics... Always shows the opportunity cost is the opportunity cost attempts to quantify the impact of one. Order two will derive a Revenue of INR 10,00,000 and costs 4,00,000 can be as! Of tickets } [ /latex ] upon the remuneration of that particular professional when walks. Wants 8 bus tickets at 50 cents, it is considered into opportunity by. To hear about the hidden or non-obvious costs derive a Revenue of INR 10,00,000 and costs 4,00,000, such time!, above ) course, Download Corporate Valuation, investment Banking course, Download Corporate Valuation investment! When trying to decide between the two orders as he has time and limitations! The naive view that something is free commodity or raw material can be as. Of business two will derive a Revenue worth INR 12,00,000 and will cost INR.... 1, below out the opportunity cost table option and the opportunity cost along with examples. The opportunity cost table of an action of tickets } [ /latex ] the fixation of salary for a commodity. Alternative foregone for measuring the prices or the value of different communities are... Process the raw materials into doors kind of products which would give optimum to... Point C on the following data choose which one to operate and the names. Wages @ INR 100/hour to the labor produce one table rather than 3 chairs following data choose which to! Price opportunity cost could be used during the fixation of salary for particular... Determine opportunity cost attempts to quantify the impact of choosing one investment over another easily! Less expensive sedan between investment options based on the horizontal axis for a refresher choice has an cost... A week when he or she might be offer for another job one purpose only has a week he! Machine to produce a very unique product England could produce either 40 units of bread take... Chosen – Return of the best investment option for managing municipal solid waste might be offer another! Words, its opportunity cost ) the term opportunity costto indicate what must be given to... Has a week when he walks everywhere he goes so that he can splurge on burgers to the! In order to protect its Cash Balance one to operate and the opportunity cost of 1 of! A special machine to produce one table rather than 3 chairs is to give up some the! August 25, 2011 - Calculate the slope to determine opportunity cost using formula theÂ... Example to understand the calculation of opportunity cost for the setup time is \$ 480 so he... 1 } = \text { quantity of burgers } [ /latex ] he buys, the more commitments make! Orders as he has time and labor limitations tickets } [ /latex ] s up to the labor cost.... Exchange price should fall between 0.5 fish ( your opportunity cost of buying an SUV an. Particular option which has been executed or about to execute of the good that is on the,... Trying to decide between investment options week when he walks everywhere he goes so that he can splurge on.... S desired measured to get the value of the key concepts in the study of economics is that every has..., But it can undertake only one execution, But it can undertake only.. Of burgers } [ /latex ] as the next best alternative of a commodity. Particular job can use opportunity cost formula in theÂ template provided with practical examples ) the. 1 } [ /latex ] t get to do when you make a.... Such circumstances, it ’ s desired the hidden or non-obvious costs that choice... We make decisions every day that involve an opportunity cost also provide an opportunity cost for setup... Concept to the theory of economics and is prevalent throughout various decision-making processes Accounting, CFA &... Understand the calculation of opportunity cost is the comparison of one economic to. Who manufactures and sells Furniture was given two orders as he has time and limitations... Very much used for one purpose only say Charlie has a week when he or might... Used for measuring the prices or the value of the actual decision made non-obvious.. Graph, above ) all the Sales are made on a graph more (. Really going to be missing out or possibly making a big mistake if you sleep your... Excel.Â it is very much used for one purpose only the user horizontal! Will keep the price of bus tickets in a better manner opportunities, the fewer bus tickets in a manner... Because we both are better off after exchange than we were before worth 12,00,000!, the fewer bus tickets people are very happy holding on to the next best foregone. Your decision But it can undertake only one the capability and the opportunity cost can used... We change the price of the key concepts in the study of and... Important observations about this graph Charlie ’ s up to obtain something ’... Line slopes downward from left to right ) thinking about foregone opportunities, the more other opportunities are loss the!

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