Question

John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual opportunity cost of the financial capital that has been invested in the business

Answer 1

Answer:

$ 170

Explanation:

John's opportunity cost = interest that his savings could have earned in the bank + financial costs of the loan = ($1,000 x 3%) + ($2,000 x 7%) = $30 + $140 = $170

The opportunity cost is the extra cost or benefits lost from choosing one activity or investment over another alternative.