Question

Suppose Sam operates his taco restaurant in a building he owns, which otherwise could have been rented out for $4000 per month. A new plan has come to his head: Sell the building and rent the space in a new location for$3000 per month. But, Sam dropped the idea to make the move. He says, “ I would like to have my taco restaurant in the new location, but I pay no rent for my restaurant now, and I don’t want to see my costs increase by $3000 per month.” What do you think of Sam’s reasoning?

Answer 1

It is important to note that the economic cost and the accounting cost needs to be considered here. The accounting cost is explicit cost while the economic cost is the implicit cost or the opportunity cost.

Sam's reasoning is flawed here for the following reason - Sam will need to shell out $3000 if he moves to the new location. However, his opportunity cost of having a Taco restaurant in his own building is $4000. Because he could have rented that space and earned $4000 a month.

Therefore,

Net Gain for Same if he moves to another location = 4000 - 3000

Or,

Net Gain for Same if he moves to another location = $1,000

Therefore, Sam would gain $1,000 if he moves to the new location instead of losing out. While his cost increases by $3000, his earnings (by renting the current space) will increase by $4000.