Question

Assume that currently you have some cash and property and you work for a company. Your current net income from all sources (including your wages from employment) is $150,000 annually. Further assume that you resign from your position and use all your resources to go to business by yourself and in the first year you made a net profit of $120,000. Then, the opportunity cost of running your own business is: a. $120,000 b. $150,000 c. $,270,000 d. only your wages at your old job. e. none of the above.

Answer 1

Opportunity cost is the cost of giving something up for getting something else in return.

Thus here the opportunity cost of running own business will be equal to the used up resources plus the wages foregone which one would have got if he continued to be employed at the company.

Thus option B is correct - $150,000

This is because for establishing own business the person lost all its resources (as they were used up) and also the wages that he was getting from the company and was only left with the profit from his new business. Thus the opportunity cost of running new business will be equal to the wages and resources that he had to give up for his business.