Question

Norman Dowd owns his own taxi, for which he bought a $10,100 permit to operate two years ago. Mr. Dowd earns $30,300 a year operating as an independent but has the opportunity to sell the taxi and permit for $37,000 and take a position as dispatcher for Carter Taxi Co. The dispatcher position pays $28,000 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 $37,000 and can earn a 9 percent return.

Required

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

2. 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 dispatcher?

Norman Dowd owns his own taxi, for which he bought a $10,100 permit to operate two years ago. Mr. Dowd earns $30,300 a year operating as an independent but has the opportunity to sell the taxi and permit for $37,000 and take a position as dispatcher for Carter Taxi Co. The dispatcher position pays $28,000 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 $37,000 and can earn a 9 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 dispatcher? a. Opportunity cost Operating as an independent Working as a dispatcher Should Mr. Dowd sell the taxi and accept the position as dispatcher?

Answer 1

a.Opportunity cost is the salary obtained as a dispatcher and interest on $37000

i.e. $28000 + 37000*9%

= $31,330 per year

b.Operating as independent = $30,300

Working as dispatcher = $31,330

YES, since more money

Note: Amount incurred two years ago is a sunk cost and is not relevant