Question

Calculating costs Kate is working for a consulting firm making $50,000 per year but considers starting her own consulting company. Kate has determined that to launch the business, she needs to invest $80,000 of her own funds. The annual cost of running the business will include $50,000 for the rent of the office space, $180,000 for employee wages, and $8,000 for materials and utilities. Kate plans to manage the business, which means that she will have to quit her current job. Suppose that the interest rate (or rate of return) on investments in the economy is 5%.

Kate's total implicit cost per year is_____ . Kate's total cost per year is______

Answer 1

Implicit cost =$54,000

Total cost = $292,000.

Step-by-step explanation:

The implicit cost is the sum of value of the next best alternative sacrificed in favour of a decision.

The implicit cost for Kate includes

The job salary to be lost = $50,000

Interests lost by not depositing the sum = (5%× 80,000)= $4,000

Implicit cost

= $50,000 +$4,000

=$54,000

Implicit cost =$54,000

Total cost

Total cost i the sum of implicit cost and accounting cost

Total cost = 50,000 + 180,000 +8000 + 54,000

Total cost = $292,000.