Question

Suppose you decided to start your own food truck. To purchase the necessary equipment, you withdrew $2,000 from your savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 5%. What is your annual opportunity cost of the financial capital that has been invested in the business? a. $260 b. $340 c. $660 d. $80

Answer 1

Opportunity cost is sacrifice of an income from one alternative when other alternative has choosen.

To purchase the necessary equipment you withdrew $2000 from your saving account which was earning 3% interest. It means you could earn 3% interest income if you would not use that money in your own business.

Hence, the loss of interest income on your own saving is the opportunity cost.

Opportunity cost = Interest income on your saving

=> Opportunity cost = ($2000) * (0.03)

=> Opportunity cost = $60.

Note: The answer would be $60.

But it is not in the option, please check the options again.