Question

This attempt took Question 1 1/1 pts Questions 1 to 5 refer to the following. Mankiw, page 264, question 2. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Define opportunity cost. What we give up to obtain an item or engage in an activity What we get from scarce resources What we get from selling an output What we pay for the inputs used

Answer 1

1. Opportunity cost : Opportunity cost the cost incurred in the last best alternative forgone. Therefore it is the cost we give up to obtain an item or engage in an activity.

2. $500,000 is the explicit cost as this much money have to bare by my Aunt to start the business

3. $50,000 is my aunt's implicit cost, that she was getting as an accountant. This cost is her cost as an accountant, which she won't get if she quit her job.

4. My aunt's implicite cost was $50,000 and explicit cost was $500,000. Therefore, her opportunity cost of running a hardware store for a year is = $550,000

5. Given, Total revenue= 510,000

total cost =$ 500,000

Profit = Total revenue - total cost = $510,000- $500,000 = $10,000

The profit is positive

Yes, she should open the store. In accounting purpose we only take the explicit cost not the implicite cost therefore she should open the store.