Ms. Lollipop opened a candy store in December 2013. She rented a building for $25,000 a year and used $30,000 from her savings account, which earned an annual interest rate of 5 percent, to buy capital equipment. During the first year of operation, Lollipop paid $28,000 to her employees, $10,000 for utilities, and $16,000 for goods she bought from other firms. In December 2014, the market value of Lollipop's capital equipment was $26,000. Lollipop's best alternative to running her candy store is to work as a sales clerk at Winn-Dixie for $15,000 a year. What is Lollipop's total opportunity cost?
A) $99,500
B) $94,000
C) $79,000
D) $20,500

Question

Quizplus · Accepted Answer

Lollipop's total opportunity cost includes the explicit costs and the implicit costs. Explicit costs are the rent ($25,000), wages ($28,000), utilities ($10,000), and goods ($16,000), totaling $79,000. Implicit costs include the forgone interest from her savings ($30,000 * 5% = $1,500) and her forgone salary as a sales clerk ($15,000). Adding these implicit costs ($1,500 + $15,000 = $16,500) to the explicit costs ($79,000) gives a total opportunity cost of $95,500. However, the market value of the capital equipment decreased by $4,000 ($30,000 - $26,000), which should be considered as an additional implicit cost, making the total opportunity cost $99,500.

Ms Lollipop Opened a Candy Store in December 2013