Sam Smith is currently employed as a mechanical engineer and is paid $65,000 per year plus benefits that are equal to 30% of his salary. Sam wants to begin a consulting firm and decides to leave his current job. After his first year in business, Sam's accountant informed him that he had made $45,000 with his consulting business. Sam also notices that he paid $6,000 for a health insurance policy, which was his total benefit during his first year.
What was Sam's opportunity cost?
Opportunity Cost is the cost involved in foregoing the next best alternative while making decisions. As an example - a business owns its building. If the company moves out of that premise, the building could be rented to someone else. The opportunity cost of staying there is the amount of rent the company would get if it was rented..
Answer and Explanation:
Sam Smith is paid $65,000 and the benefits paid is 30% of his salary which equals $19,500. Therefore, the opportunity cost for Sam choosing the consulting business is $65,000 + $19,500= $84,500
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from Economics 102: MacroeconomicsChapter 1 / Lesson 3