Question

A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes ​$60,000 per year as an employee of the Ajax​ Company, and she anticipates no raise for at least another year. She believes she can make ​$219,000 as an independent consultant in​ six-sigma "black​ belt" training for large corporations. Her​ start-up expenses are expected to be ​$119,000 over the next year. What is the expected opportunity cost of a) keeping her job, and b) quitting her job.

Answer 1

Solution:

Let's call this friend as A. So, A earns $60,000 if she keeps her job. If she quits her job, to start the business for herself, her expected net earning = Expected earnings - expected cost

Expected net earning = $219,000 - $119,000 = $100,000

Opportunity cost is the cost a person bears by giving up the next best alternative, and taking up another task.

So, as the meaning suggests, expected opportunity cost of A (per year, for next year):

a) Of keeping her job (undertaken task) = expected net earnings of starting own business (next best alternative)

= $100,000

b) Of quitting her job = Expected net earnings by keeping her job (which, here is not expected as it is a sure amount she is earning, without any uncertainty) = $60,000