Question

Joe runs a restaurant. He pays his employees​ $200,000 per year. His ingredients cost him​ $50,000 per year. Prior to running his​ restaurant, Joe was a lawyer earning​ $150,000 per year. What would economists say is​ Joe's cost of running the​ restaurant?

Answer 1

Cost incurred while running a restaurant:

Salary paid = $200,000 per year

Ingredients cost = $50,000 per year

Before running this restaurant, he was earning $150000 per year.

Here, we are using a concept called opportunity cost.

Opportunity cost refers to the benefit of a commodity that is forgone to produce one extra unit of some other commodity.

It is also refers to the value of next best alternative that is given up by choosing some other alternative.

In this question, opportunity cost of running a restaurant is the income that is earned when he was a lawyer, i.e, $1,50,000 per year. This is the income that is foregone when he started running a restaurant.