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Greg, a landscaper, is planning on opening his own landscaping company. He currently earns $50,000 per year working for his uncle but he will need to quit that job. He hires one employee at an annual wage of $15,000. He needs to pay rent of $8,000 per year. He plans to use $12,000 in savings to pay for the equipment he needs, the market value of the equipment at the end of the year is $10,000. Also he needs to buy $3,000 of goods and services from other firms. The current interest rate on savings is 7 percent. Greg predicts that the revenue from the new landscaping company is $80,000 a year. What is total opportunity cost incurred by Greg in running his own business

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Parrain

Answer: $52,840

Explanation:

The opportunity cost are the benefits he will give up to pursue his current venture of landscaping.

= Salary from working for uncle + Interest on the Savings to be used in business + Difference in market value if he waits till the end of the year

= 50,000 + (7% * 12,000) + (12,000 - 10,000)

= $52,840

The total opportunity cost incurred by Greg in running his own business is $52,840.

It should be noted that opportunity cost simply means the real cost of a foregone alternative. Opportunity cost arises as a result of scarcity of resources.

Therefore, the total opportunity cost incurred by Greg in running his own business will be:

= Salary from working for uncle + Interest on the Savings to be used in business + Difference in market value if he waits till the end of the year

= 50,000 + (7% × 12,000) + (12,000 - 10,000)

= 50000 + 840 + 2000

= $52,840

In conclusion, the opportunity cost is $52840.

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