micro question help

[cameotodd]

Hey guys,
Doing into to micro at melb uni, and its my first time doing eco, so please help me with this question.

- 'Wally is considering starting his own website development business. To start the business, he will have to reduce to half time in his current job, from which he earns 50k per year. As well, he has already paid 5k to study a web developers course, and would have to use 10k from his savings to pay for extra computer equipment he would need in the business. The computer equipment could be resold for 5k at the end of one year if Wally decided to discontinue the business. There is currently an interest rate of 10% per annum. What will Wally's opportunity cost be from operating the business for one year?'

Now, i think that the 5k he already paid to do the course is a sunk cost. Would the opportunity cost be 25k from his job plus the 10k from buying the new computer? What does the 10% interest rate have to do with anything as he is buying from his savings?

[alchemy]

Wait we have micro questions to do? Where do I find them?

[cameotodd]

Wait we have micro questions to do? Where do I find them?

This is from the blue sheet from tutorials

[alchemy]

This is from the blue sheet from tutorials

oh I didn't go to the tute lol...
I'll try see if I can find a copy on LMS

[alchemy]

To answer your question, I believe the 5k is a sunk cost, which means the opportunity cost is 1.1 * (25k + 10k) = $38.5k. Bear in mind that I factored in the 10% interest rate.
I could be wrong as this is my first time doing eco as well, perhaps someone else can confirm.

[notveryasian]

Nice to see that Intro Micro tute questions haven't changed over the years 

The opportunity cost from his income is indeed $25k, but the opportunity cost from the computer equipment would be $5k because of the resale value at the end of the year. Also, there is an implicit assumption that the 10% interest rate is only on his savings, and not on his income (which would probably makes things confusing since we don't know how often he gets paid). So by going through with his idea he will lose out on the interest gained from his savings, which is 10%*10000=$1k. Total opportunity cost=$25k+$5k+$1k=$31k

I could be wrong haha I haven't done an opportunity cost question for a while.

[cameotodd]

Thanks guys

[alchemy]

Nice to see that Intro Micro tute questions haven't changed over the years 

The opportunity cost from his income is indeed $25k, but the opportunity cost from the computer equipment would be $5k because of the resale value at the end of the year. Also, there is an implicit assumption that the 10% interest rate is only on his savings, and not on his income (which would probably makes things confusing since we don't know how often he gets paid). So by going through with his idea he will lose out on the interest gained from his savings, which is 10%*10000=$1k. Total opportunity cost=$25k+$5k+$1k=$31k

I could be wrong haha I haven't done an opportunity cost question for a while.

This sounds much more correct. I'd go with this answer if I was you cameotodd!