Scenario 9.1
Jane left her job at Siemens and started her own boutique. She used to earn $50,000 annually at Siemens. She took a loan of $10,000 and used $20,000 from her personal savings to begin her venture. She agreed to repay the loan with 10% interest. Her business is bringing in $80,000 annually. She has rent and labor expenses of $15,000. Also assume that Jane could have used her own money i.e. $20,000 to buy stocks in Intel which would have returned 5% to her last year.
-Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?
A)$7,500/year
B)$8,000/year
C)$19,500/year
D)$12,000/year
E)$150,000/year

Question

Quizplus · Accepted Answer

The opportunity cost of capital for the mechanic is the same as what he could earn if he invested his money elsewhere. If he had invested in bonds, he could have earned 8% of $150,000 which is $12,000 per year. Therefore, the opportunity cost of using his own money to start his business is $12,000 per year.

Scenario 9.1 Jane Left Her Job at Siemens and Started Her Own