Ellie has been working for an engineering firm and earning an annual salary of $
ID: 1206261 • Letter: E
Question
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.
Ellie's annual implicit costs will equal
A. $165,700. B. $80,500. C. $75,200. D. $55,200.Explanation / Answer
Implicit cost refers to the opportunity cost of undertaking an activity.
For the given question, Ellie could either work for an engineering firm or open her own business.
Net revenue from working in a firm = $80,000
Net revenue from opening her own business = R-$55200
Income from interest = $500
When Ellie tries to open her own business, she will have to forgoe her salary as well as interest income = 80000+500 = $80,500
Hence, correct option is (B) $80,500
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