Answer to Question #159845 in Microeconomics for Noman

Question

Your uncle is thinking about opening a hardware store. He estimates that it would cost Rs.5,000,000 per year to rent the location and buy the stock. In addition, he would have to quit his Rs500,000 per year job as an accountant.

A.   Define opportunity cost.                                                                                             

B.    What is your uncle’s opportunity cost of running the hardware store for a year? If your aunt thinks he can sell Rs. 5,100,000 worth of merchandise in a year, should he open the store? Explain.                                                                                                                      

Answer 1

A. Opportunity cost is the foregone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the other. It can be both implicit or explicit in nature.

B. Opportunity cost = Salary foregone as an accountant

Opportunity cost = RS500000

Economic profit = TR – Implicit cost – Explicit cost

Implicit cost = Salary foregone = RS500000

Explicit cost = Rent = RS5000000

TR = RS5100000

Economic Profit = RS5100000 – RS5000000 – RS500000 = -400000

He is incurring an economic loss. So, he should not open the store.