A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes $61 comma 00061,000 per year as an employee of the Ajax Company, and she anticipates no raise for at least another year. She believes she can make $223 comma 000223,000 as an independent consultant in six-sigma "black belt" training for large corporations. Her start-up expenses are expected to be $114 comma 000114,000 over the next year. If she decides to keep her current job, what is the expected opportunity cost of this decision? Attempt to balance the pros and cons of the option that your friend is turning away from.

Question

Business

Milagros Guerrero

30 June, 12:38

A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes $61 comma 00061,000 per year as an employee of the Ajax Company, and she anticipates no raise for at least another year. She believes she can make $223 comma 000223,000 as an independent consultant in six-sigma "black belt" training for large corporations. Her start-up expenses are expected to be $114 comma 000114,000 over the next year. If she decides to keep her current job, what is the expected opportunity cost of this decision? Attempt to balance the pros and cons of the option that your friend is turning away from.

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Answers (1)

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Gretchen Murphy · Answer 1

The opportunity cost is $109,000.

Explanation:

The salary that the person is currently earning is $61,000.

She can earn $223,000 as an independent consultant.

The expected expenses are $114,000.

If she decides to keep her job the opportunity cost will be the profits she could have earned as an independent consultant.

The opportunity cost here is

= Earnings - Expenses

= $223,000 - $114,000

= $109,000

The opportunity cost of quitting job will be the salary that she is currently earning

= $61,000

The opportunity cost is lower if she quits her job and starts working independently.