Question

Mike wants to open his own repair shop, and is considering using his savings of $30,000 to get it started. He is currently earning 3 percent interest on his savings. His friend Bob calls him and asks to borrow $30,000 to start up a bagel shop; Bob offers to pay him 5 percent interest if he loans him the money. If Mike were to use the money to open his own repair shop, how can he accurately account for his costs?

Answer 1

Answer:

Mike must not only consider his accounting costs, but also his implicit costs. Mike's implicit costs (or opportunity costs) should include the $1,500 in interest that he could earn by ending the money to his friend Bob and the amount of money he could earn by working somewhere else.