Suppose you inherit $10,000 and decide to use the money to start a lawn-care business. You purchase a truck and a mower for $10,000 and start mowing lawns. Your annual cost for fuel and other supplies is $2,000. Now, instead of investing your money in the lawn-care business you could have invested the $10,000 in a bank account earning 8 percent annual interest. Additionally, you could have earned $30,000 in another job if you didn’t start your own business. So what is your total annual cost (including opportunity cost) of operating your own lawn-care business? Explain.
My answer was that the total cost would be $32,800 I got this value by calculating the interest from bank+income from job+ $2000 from expenses. I did not list the inherited ten thousand because it really was not a cost.
Is this right please help!
I agree.
Your calculation is partially correct, but let me provide you with a more detailed breakdown of the total annual cost, including the opportunity cost, of operating your own lawn-care business.
1. Cost of purchasing the truck and mower: $10,000
This is the initial cost of acquiring the necessary equipment for your business.
2. Annual cost for fuel and other supplies: $2,000
This is the ongoing expense required to operate your lawn-care business.
3. Opportunity cost of not investing $10,000 in a bank account earning 8% interest: $800
If you had chosen to invest the $10,000 in a bank account earning 8% annual interest, you would have earned $800 in interest.
4. Opportunity cost of not earning $30,000 in another job: $30,000
This represents the potential income you could have earned if you had chosen to work in another job instead of starting your own business.
To calculate the total annual cost, you need to add up all these costs:
Total annual cost = Cost of purchasing equipment + Annual expenses + Opportunity cost of interest + Opportunity cost of job income
= $10,000 + $2,000 + $800 + $30,000
= $42,800
Therefore, the total annual cost, including the opportunity cost, of operating your own lawn-care business would be $42,800.
Your answer is partially correct. The total cost of operating your own lawn-care business includes both explicit costs (such as fuel and supplies) and opportunity costs (such as the foregone interest and income from a different job).
To calculate the total annual cost, you need to consider the following:
1. Explicit Costs:
Your annual cost for fuel and other supplies is $2,000.
2. Opportunity Costs:
a) Foregone Interest:
If you had invested the $10,000 in a bank account earning 8 percent annual interest, you would have earned an additional $800 ($10,000 * 0.08).
b) Foregone Income:
If you didn't start your own business, you could have earned $30,000 from another job.
Therefore, the total annual cost of operating your lawn-care business is:
$2,000 (explicit cost) + $800 (foregone interest) + $30,000 (foregone income) = $32,800.
So, your calculation is correct. The inherited ten thousand dollars is not considered a cost because it was not spent on the business. However, it is essential to consider the opportunity cost when analyzing the profitability of starting a business.