Question

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 ?

Answer 1

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.