Question

Jane quits her computer programming job, where she was earning a salary of $75,000 per year, to start her own computer software business in a building that she owns and was previously renting out for $30,000 per year. In her first year of business she has the following expenses: salary paid to herself, $60,000; rent, $0; other expenses, $27,500. Find the economic cost associated with Jane’s computer software business.

Answer 1

Economic cost is the combination of losses of any goods that have a value attached to them by any one individual. Economic cost is the combination of losses of any goods that have a value attached to them by any one individual.

So ECONOMIC COST= Accounting cost + opportunity cost

= (27500 )+ ( 75000+30000)

= $132500

Accounting costs are explicit cost which are paid out of the pocket therefore, salary paid to herself is not included in the accounting cost as salary paid to her by job is already included in implicit cost ; opportunity cost.