Question

Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Refer to Scenario 13-9. Ellie's annual economic costs will equal?A. $75,200. B. $55,200. C. $80,500. D. $135,700.

Answer 1

Answer: Option D

Explanation: Economic cost is the total cost a firm bears in the form of expenses incurred and opportunity cost incurred. Opportunity cost can be defined as the loss of profit for choosing one alternative over other.

In the given case salary and interest on certificate of deposit is the opportunity cost for Ellie.

so,

Economic cost = $80,000 + $15000 + $3000 + $1000 + $1200 + $35,000 + $500

                       = $135,700