Question

Ed is a freelance writer who could work for a newspaper for a salary of $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. What is the total opportunity cost incurred by Ed in running his own business?

Answer 1

Answer:

$38,000

Explanation:

Opportunity cost is the benefit forgone for choosing another alternative by the individual.

In this case, the total opportunity cost incurred by Ed in running his own business is the cost that is needed to maintain the business and the opportunity to attain a salary of $25,000 for working for a newspaper. Calculation is as follows:

Business Expenses + Rent + Salary (not availed) = Opportunity cost

1,000 + 12,000 + 25,000 = $38,000

Hence, the opportunity cost for running his own business is $38,000.