Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have quit her $50,000 per year job as a sales clerk.
a. What is your aunt’s opportunity (economic) cost of running the hardware for a year?
b. If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.
a. The opportunity cost of running the hardware store for a year would be the sum of the annual rent and stock cost ($500,000) plus the lost income from quitting her job ($50,000), which equals $550,000 per year.
b. It depends on the profit margin of the merchandise. If the profit margin is high enough to cover the $550,000 opportunity cost and generate additional profit, then she should open the store. However, if the profit margin is too low and the store would not generate enough profit to cover the opportunity cost, it would not be financially feasible to open the store. Additionally, market competition and demand for the type of hardware store she plans to open should also be considered before making a final decision.