Suppose a persona quits a job paying $40,000 per year and starts a business with $100,000 withdrawn from a money-market account earning 8 percent per year. The implicit cost of the business is ____ for the entrepreneurs time plus _____ for the entrepreneurs funds.
Can someone help me with the formaula on how to do this!! thanks
To calculate the implicit cost of starting a business, we need to consider two components: the opportunity cost of the entrepreneur's time and the opportunity cost of the funds used for starting the business.
1. Opportunity cost of the entrepreneur's time:
The opportunity cost of the entrepreneur's time is the salary they were earning at their previous job, which was $40,000 per year. This means that by starting the business, they are forgoing this income.
2. Opportunity cost of the funds:
The opportunity cost of the funds used for starting the business can be calculated by multiplying the amount of the funds ($100,000) by the interest rate (8 percent). This gives us the annual return that the entrepreneur could have earned if they had kept the funds in the money-market account instead of using them for the business.
Now let's calculate the implicit cost:
1. Implicit cost for the entrepreneur's time: $40,000 per year
2. Implicit cost for the entrepreneur's funds: $100,000 × 8% = $8,000 per year
Thus, the implicit cost of the business is $40,000 for the entrepreneur's time plus $8,000 for the entrepreneur's funds.
To calculate the implicit cost for the entrepreneur's time and funds, you need to consider the opportunity cost. The opportunity cost is the value of the next best alternative that the entrepreneur has given up by starting their own business.
In this scenario, the entrepreneur is quitting a job that pays $40,000 per year. So the implicit cost for the entrepreneur's time is $40,000.
The entrepreneur also withdraws $100,000 from a money-market account that is earning 8 percent per year. The implicit cost for the entrepreneur's funds is the forgone interest or earnings on the money-market account. To calculate this, you can multiply the amount withdrawn ($100,000) by the interest rate (8 percent or 0.08). So the implicit cost for the entrepreneur's funds is $100,000 * 0.08 = $8,000.
Therefore, the implicit cost of the business is $40,000 for the entrepreneur's time plus $8,000 for the entrepreneur's funds.