Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?
45,000
To calculate the economic cost of the time Jim contributes to his new business, we need to consider the difference between his previous annual salary and his current salary.
The economic cost is the value of the next best alternative that Jim gave up by choosing to start his own business.
Step 1: Calculate the difference in annual salary:
Previous Annual Salary - Current Annual Salary
= $70,000 - $25,000
= $45,000
Step 2: The economic cost of Jim's time is the difference in salary, which is $45,000. This represents the value of the time he contributes to his new business, as he could have earned that amount working elsewhere.
Therefore, the economic cost of the time Jim contributes to his new business is $45,000.
To determine the economic cost of Jim's time contributed to his new business, we need to consider the opportunity cost. Opportunity cost refers to the value of the next best alternative that is forgone when making a decision.
In this case, Jim's opportunity cost is the difference between his previous salary as a sales manager ($70,000) and the amount he pays himself from his new business ($25,000). Therefore, the economic cost of his time contributed to the new business can be calculated as follows:
Opportunity Cost = Previous Salary - Current Salary
Opportunity Cost = $70,000 - $25,000
Opportunity Cost = $45,000
Hence, the economic cost of the time Jim contributes to his new business is $45,000.