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 useExplanation / 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.
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