Question

Example:
Jodi is a successful lawyer. She earns $50,000 per year from her law job plus $5,000 per year in rental income from a building she owns that is rented to a clothing store. Jodi also has $10,000 in a savings account that earns 10% interest, or $1,000 per year.

One day, Jodi decides to leave her profession and open a bookstore in the building she owns. She withdraws the money from her savings account and uses it to purchase special computer software for the bookstore. At the end of the year, her accountant sends her the following statement:

Total sales: $200,000

Total expenses:

            Cashiers’ wages: $50,000

            Books purchased:       $75,000

            Advertising:                $5,000

            Insurance:                   $5,000

            Taxes:                         $10,000

            Accountant fees:     $5,000

            Total:                         $150,000

Answer 1

Jodi is a successful lawyer and based on her income from salary and other incomes, it is given as

Income from being lawyer + savings account interest + rent from building

=$50,000+1000+5000

=$56,000

This would be her implicit cost or opportunity cost when she decides to leave her job and start a book store.

Total sales =$200,000

Total cost=$150,000

Total profit=$50,000

In terms of accounting profit or explicit cost, Jodi is earning a profit of $50,000.

But when the economic cost is also being included, it is seen that Jodi is at a loss.

Economic profit= accounting profit- implicit cost

=$50000-56,000

=$(-)6000

This means if she is giving up her job, she is incurring a loss from her previous position, even though her salary and profit from sales is same. This is because the rent of the building and the interest on savings is being given up in second choice.

Hence in terms of opportunity cost, she should be taking up the first choice ie continue her job as lawyer.

(You can comment for doubts)