Question

A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes ​$61 comma 00061,000 per year as an employee of the Ajax​ Company, and she anticipates no raise for at least another year. She believes she can make ​$223 comma 000223,000 as an independent consultant in​ six-sigma "black​ belt" training for large corporations. Her​ start-up expenses are expected to be ​$114 comma 000114,000 over the next year. If she decides to keep her current​ job, what is the expected opportunity cost of this​ decision? Attempt to balance the pros and cons of the option that your friend is turning away from.

Answer 1

The opportunity cost is $109,000.

Step-by-step explanation:

The salary that the person is currently earning is $61,000.

She can earn $223,000 as an independent consultant.

The expected expenses are $114,000.

If she decides to keep her job the opportunity cost will be the profits she could have earned as an independent consultant.

The opportunity cost here is

= Earnings - Expenses

= $223,000 - $114,000

= $109,000

The opportunity cost of quitting job will be the salary that she is currently earning

= $61,000

The opportunity cost is lower if she quits her job and starts working independently.