Your friend works as a software analyst and earns $80000 a year. She also has a...

Your friend works as a software analyst and earns $80000 a year. She also has a part-time job of baking cooking for school and party events. She earns up to $500 per event and caters as many as five events a month . She is wondering if she should switch to baking cookies full time when she might be able to cater 25 events a month. Her operating expenses would be expected to rise by $10000 per year. What is the opportunity cost for her is she switches to full-time crating? What recommendation would you make to your friend about her career, after weighing the pros and cons of each option ?

Expert Solution

If she works as a software analyst and part time job of baking cooking for 5 events a month at $500 per event

Income she earns in a year = salary + part time earning = $80,000 + 5 x $500 x 12 = $110,000.

If she switch to baking cookies full time,

Then her total cost = explicit cost + implicit cost

Explicit cost is the expense that occurs in operating a business, that is $10,000 per year.

Implicit cost is the opportunity cost. Opportunity cost is the amount of income which is foregone for baking cookies full time. That is $110,000.

Opportunity cost = $110,000

Total revenue of a year from full time baking cookies = 25 × $500 × 12 = $150,000.

Now for weighing pros and cons we will calculate economic profit. If her economic profit is positive the she should switch to full time baking cookies.

Economic profit = Total revenue - Explicit cost - Implicit cost = $150, 000 - $10,000 - $110, 000 = $30,000

She should full time baking cookies and leave her job of software analyst as her economic profit of baking cookies full time is positive.

Rahul Sunny answered 11 months ago

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