Question

Abid and Arjun decided to quit their jobs and set up a new business. Abid invested his savings worth Rs 10 lakhs in the business which could have earned him interest at the rate of 10% per annum. Abid was earning Rs 5 lakhs/year and Arjun was earning Rs 6 lakhs/year on their jobs. Which of the following is correct?

• A. Arjun's opportunity cost of setting up the business is more
• B. Abid's opportunity cost of setting up the business is more
• C. Both have the same opportunity cost
• D. Cannot be concluded

Answer 1

The correct option is C

Both have the same opportunity cost

Arjun's opportunity cost is his forgone salary. Abid's opportunity cost is the sum of hos forgone salary and the potential return on investing Rs 10 lakh at 10% per annum.

Arjun's opportunity cost = Rs 5 lakh
Abid's opportunity cost = Rs 4 lakh + Rs 10 lakh x 10 /100
= Rs 5 lakh