You can work at a local plant making $36,000 a year, or you could choose to open

Question

You can work at a local plant making $36,000 a year, or you could choose to open a gift shop.
Assume that except for monetary reward you do not care which of the two you decide to pursue. In the gift shop, you must invest your savings of $20,000 [Fixed Cost] to set up the business. The annual 'cost of operating' your gift shop is $5,000.

If you do not open your gift shop, you could earn 10% bank interest annually on your $20,000.

What is the 'Explicit Cost' ($) of opening the gift shop?

(Points: 3)
22,000
5,000
25,000
7,000

Explanation / Answer

The "explicit cost" includes only the actual cash that you give up, and it does not include things like opportunity cost (the interest payments that you would have received on your money). Therefore, it's $20,000 + $5,000 = $25,000.

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