Question

Bob manages a cafe. He pays $50,000 for labor and $7,000 for space rental every month. He chose the current space and gave up another site which costs $8,000/month. Bob also refused an acquistion proposal of $600,000 raised by a restaurant. The proposal plans to close down the cafe. What is the opportunity cost in this case

Answer 1

Answer:

$600,000

Explanation:

Opportunity  cost also known as implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

the next best option to Bob is to sell the cafe. If he did, he would have earned $600,000. This is his opportunity cost.

$50,000 constitutes a variable cost while $7000 is a fixed cost.

Fixed costs are costs that do not vary with output. e,g, rent, mortgage payments

If production is zero or if production is a million, Rent payments do not change - it remains the same no matter the level of output.  

Variable costs are costs that vary with production

If a producer decides not to produce any output, there would be no need to hire labour and thus no need to pay hourly wages.