Exercise 13-5A: Opportunity Costs

Norman Dowd owns his own taxi, for which he bought an $11,000 permit to operate two years ago. Mr. Dowd earns $33,000 a year operating as an independent but has the opportunity to sell the taxi and permit for $40,000 and take a position as a dispatcher for Carter Taxi Co. The dispatcher position pays $31,000 a year for a 40-hour week. Driving his own taxi, Mr. Dowd works approximately 55 hours per week. If he sells his business, he will invest the $40,000 and can earn an 11 percent return.

Required:

a. Determine the opportunity cost of owning and operating the independent business.

b. Calculate the earnings of Norman Dowd operating as an independent and the earnings of Norman Dowd working as a dispatcher.

Based solely on financial considerations, should Mr. Dowd sell the taxi and accept the position as a dispatcher?

To calculate the opportunity cost, we compare the earnings from operating as an independent ($33,000) with the earnings from working as a dispatcher ($31,000).

The difference between the two is the opportunity cost of owning and operating the independent business, which is $2,000. Since Mr. Dowd works approximately 55 hours per week driving his own taxi, we divide the opportunity cost by the number of hours worked per week to determine the hourly opportunity cost.

The hourly opportunity cost is approximately $36.36 ($2,000 divided by 55 hours). Multiplying the hourly opportunity cost by the number of hours worked per year (55 hours/week * 52 weeks) gives us an annual opportunity cost of $4,840.

b. Earnings comparison and financial decision:

Norman Dowd's earnings as an independent are $33,000 per year, while their earnings as a dispatcher would be $31,000 per year. Based solely on financial considerations, Mr. Dowd should sell the taxi and accept the position as a dispatcher.

This decision is driven by the higher earnings potential as a dispatcher and the opportunity cost of owning and operating the independent business.

It's important to note that this analysis is based solely on financial considerations and does not take into account other factors such as job satisfaction, work-life balance, or personal preferences that may influence Mr. Dowd's decision.

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VinyaTh78 VinyaTh78 · Answer 2 · 2024-03-16T16:19:44-04:00

Opportunity cost of owning the taxi business: -$2,000 (lower earnings compared to the dispatcher position). Based on financial considerations, Mr. Dowd should sell the taxi and become a dispatcher since it results in higher annual earnings by $2,000.

a. The opportunity cost of owning and operating the independent taxi business is the difference between the earnings from operating the taxi and the potential earnings from the dispatcher position.

Opportunity Cost = Earnings as Dispatcher - Earnings as Independent Taxi Driver Opportunity Cost = $31,000 - $33,000 = -$2,000 The negative opportunity cost indicates that Mr. Dowd would earn $2,000 less per year by continuing to operate his own taxi business compared to taking the dispatcher position.

b. Earnings of Norman Dowd: •Earnings as an Independent Taxi Driver: $33,000 per year (working approximately 55 hours per week) •Earnings as a Dispatcher: $31,000 per year (working 40 hours per week)

Based solely on financial considerations, Mr. Dowd should sell the taxi and accept the position as a dispatcher. By doing so, he will increase his annual earnings by $2,000. Additionally, by investing the $40,000 from selling the taxi permit and earning an 11 percent return, he can further increase his financial gains.

However, it's essential to consider non-financial factors as well, such as job satisfaction, work-life balance, and potential career growth opportunities in the dispatcher position. Mr. Dowd should weigh both financial and non-financial aspects before making a decision.

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