Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?

Question

Quizplus · Accepted Answer

The opportunity cost of financial capital is the amount of return the money could have earned in the next best alternative investment.

For the $2,000 that Gwen withdrew from her savings account, the opportunity cost is the interest she would have earned if she had left the money in the account. The interest earned would be:

$2,000 x 0.03 = $60

For the $4,000 that Gwen borrowed from the bank, the opportunity cost is the interest she would have earned if she had invested the money in an alternative investment with the same risk level. The interest earned would be:

$4,000 x 0.07 = $280

Therefore, the total annual opportunity cost is:

$60 + $280 = $340

So, the best choice is C.

Gwen Has Decided to Start Her Own Photography Studio