Question

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost (implicit plus explicit costs) of the financial capital that has been invested in the business?

Answer 1

Answer:

$170

Explanation:

Kelly's opportunity cost = ($1,000 x 3%) + ($2,000 x 7%) = $30 + $140 = $170

The opportunity cost is the cost of not choosing an alternative action.

Implicit costs are costs that occur but are not reported as separate costs.

Explicit costs are normal accounting costs.