Keeping in mind that opportunity cost is what you sacrifice when choosing some alternative, suppose you currently work for Microsoft but have never really liked the idea of being just another worker in a large corporation. Your favorite uncle Henry just died (sob) and left you a nice piece of land with a large (empty) building (inheritance tax free!) and you think this may be a good opportunity to start your own software firm. You have an idea for a great program, and as best you can determine regarding your proposed business you will need:
2 programmers @ $55,000/yr each (total compensation)
1 economic consultant @ $60,000 to come up with these numbers
Computers and software cost: $10,000
Utilities & taxes: $12,000
Insurance: $3000/yr
You expect to be able to sell the program for a total of $234,000/yr.
Other info: it is worth $10,000/yr to you to be your own boss. You currently make $103,000/yr at Microsoft (total compensation). Uncle Henry had been renting the building for $16,000/yr; the contract is up but the tenants would be willing to renew.
Calculate the total opportunity cost of each alternative: a) staying with Microsoft or b) starting your own firm. Which is the best choice according to your opportunity cost analysis? What is the economic profit if you start your own firm? _________ (show your work for all)