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of her The owner of a small retail store does her own accounting work. How would

ID: 1214749 • Letter: O

Question

of her The owner of a small retail store does her own accounting work. How would you measure the opportunity cost work? The opportunity cost of the owner's accounting work is OA the explicit cost of the work, which is zero since she does it herself. OB. the difference between the monetary value of her time and the monetary amount that her time would have been Oc. the difference between what she would have paid an accountant to do the work and the monetary value of her OD. the monetary amount that she would have paid an accountant o do the work. QE. the monetar worth in its next best use. time amount that her time would have been worth in its next best use

Explanation / Answer

The economic, or opportunity, cost of doing accounting work is measured by computing the

monetary amount that the owner’s time would be worth in its next best use. For example, if she

could do accounting work for some other company instead of her own, her opportunity cost is

the amount she could have earned in that alternative employment. Or if she is a great stand-up

comic, her opportunity cost is what she could have earned in that occupation instead of doing her

own accounting work.

The accounting cost includes only the explicit expenses, which are Joe’s salary and his other

expenses: $45,000 + 20,000= $65,000. Economic cost includes these explicit expenses plus

opportunity costs. Therefore, economic cost includes the $21,000 Joe gave up by not renting the

building and an extra $10,000 because he paid himself a salary $20,000 below market ($65,000

45,000). Economic cost is then $45,000+$20,000+$21,000 +$20,000 =$106,000.