Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

Question

Quizplus · Accepted Answer

Opportunity cost refers to the trade-off that must be made when choosing one option over another. In Sarah's case, her opportunity cost is the income she is giving up by quitting her job to run her own business. Therefore, her annual opportunity cost is equal to her salary of $40,000 per year. She is not giving up her savings of $50,000 with an annual 10% rate of return because she plans to invest it in the business. Therefore, the correct answer is option C, which is $45,000.

Sarah Earns $40,000 Per Year Working for a Large Corporation