One year ago, Jack and Jill set up a vinegar-bottling firm
(called JJVB). Use the following information to calculate
JJVB’s opportunity cost of production during its first year
Jack and Jill put $50,000 of their own money into the firm.
equipment for $30,000.
They hired one employee to help them for an annual wage of
Jack gave up his previous job, at which he earned $30,000,
and spent all his time working for JJVB.
Jill kept her old job, which paid $30 an hour, but gave up
10 hours of leisure each week (for 50 weeks) to work for JJVB.
JJVB bought $10,000 of goods and services from other firms.
The market value of the equipment at the end of the year was
Jack and Jill have a $100,000 home loan on which they pay
an interest rate of 6 percent a year.
The wages paid, $20,000, and the goods and services bought from
other firms, $10,000, are opportunity costs to JJVB. Other
opportunity cost include the interest forgone on the $50,000 put
into the firm, which could have been used to pay part of the mortgage,
so the interest forgone is $3,000; the $30,000 income forgone by
Jack not working at his previous job; $15,000, which is the value
of 500 hours of Jill’s leisure (10 hours a week for 50 weeks);
and the economic depreciation of $2,000 ($30,000 minus $28,000).
JJVB’s total opportunity cost is the sum of all these opportunity
costs and is $80,000.