Jermaine wants to open his own repair shop, and is considering using his savings of $30,000 to get it started. He is currently earning 3 percent interest on his savings. However, Jermaine's friend Bob wishes to borrow the $30,000 to start up a bagel shop, offering to pay Jermaine 5 percent interest if he loans out the money. If Jermaine were to use the money to open his repair shop, rather than loan it to Bob, how can he accurately account for his costs? A)Jermaine must consider the $900 in forgone interest on his savings as an implicit cost. B)Jermaine must consider the $1,500 in forgone interest from loaning the money to Bob as an implicit cost. C)Jermaine must consider the $900 in forgone interest on his savings as an explicit cost. D)Jermaine must consider the $1,500 in forgone interest from loaning the money to Bob as an explicit cost.

Question

Quizplus · Accepted Answer

The forgone interest from loaning the money to Bob is an implicit cost because it represents the opportunity cost of not choosing the next best alternative, which is loaning the money to Bob at a higher interest rate.

Jermaine Wants to Open His Own Repair Shop, and Is