The following figure shows the cost and revenue structures of a firm. MC represents the marginal cost curve, AC represents the average cost curve, AR represents the average revenue curve, and MR represents the marginal revenue curve. P* is the equilibrium price and Q* is the equilibrium output.Figure 9.5

-Suppose Mark invests a sum of $100,000 in a new venture. To fund his investment, Mark withdraws $50,000 from a savings account paying 10% per year and uses the proceeds from a bond that has just matured worth $50,000. If he had reinvested the proceeds from the bond, he could have earned interest at the rate of 5%. Calculate the opportunity cost of capital for Mark in a particular year.
A)$5,000
B)$7,500
C)$10,000
D)$12,500
E)$100,000

Question

The following figure shows the cost and revenue structures of a firm. MC represents the marginal cost curve, AC represents the average cost curve, AR represents the average revenue curve, and MR represents the marginal revenue curve. P* is the equilibrium price and Q* is the equilibrium output.Figure 9.5
 
-Suppose Mark invests a sum of $100,000 in a new venture. To fund his investment, Mark withdraws $50,000 from a savings account paying 10% per year and uses the proceeds from a bond that has just matured worth $50,000. If he had reinvested the proceeds from the bond, he could have earned interest at the rate of 5%. Calculate the opportunity cost of capital for Mark in a particular year.
A)$5,000 
B)$7,500 
C)$10,000 
D)$12,500 
E)$100,000

Quizplus · Accepted Answer

The opportunity cost of capital for Mark includes the interest he would have earned from both the savings account and the bond if he had not withdrawn the money for his new venture. From the savings account, he would have earned $50,000 * 10% = $5,000. From the bond, he would have earned $50,000 * 5% = $2,500. Therefore, the total opportunity cost is $5,000 + $2,500 = $7,500.

The Following Figure Shows the Cost and Revenue Structures of a Firm