Question

Cost and benefit in economic example

Answer 1

Cost and benefit analysis is an attempt to estimate all expenses involved and possible profits to be derived from a business opportunity or proposal.

It takes into account both quantitative and qualitative factors. Benefits to costs ratio and other indicators are used to do the assessment and the objective is to ascertain the soundness of investment opportunities. Example: An entrepreneur is thinking about opening a coffee shop where lots of office workers pass by. The rent (cost) is $500.000 a month and the estimated income (benefit) is $3.000.000 a month. The location is very far from his home (cost) but he has developed good skills at customer service so it would be relaxing to provide office workers with some free enjoyable time drinking coffee (benefit). Benefits are much higher than costs so the project is cost/benefit effective.