Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. What decision should Tom make next?
A)He should close the shop and return to his old job and use of assets, because he is earning $6,000 less now.
B)He should keep the shop going, because he's earning $35,000 a year, which is a healthy amount for the business.
C)He should keep the shop going, because he's earning $5,000 more than the salary he was earning in the past.
D)He should close the shop, because the accounting profit is negative.

Question

Quizplus · Accepted Answer

Tom's opportunity cost of running the shop includes his previous salary ($30,000), rental income ($10,000), and interest income ($1,000), totaling $41,000. His current earnings from the shop are $35,000 ($50,000 revenue - $15,000 costs), which is $6,000 less than his opportunity cost.

Imagine Tom's Annual Salary as an Assistant Store Manager Is