Question

Norman Dowd owns his own taxi, for which he bought a $10,500 permit to operate two years ago. Mr. Dowd earns $31,500 a year operating as an independent but has the opportunity to sell the taxi and permit for $39,000 and take a position as dispatcher for Carter Taxi Co. The dispatcher position pays $30,000 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 $39,000 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?

Answer 1

a)

The opportunity cost would be $39,000. The reason is that Mr. Dowd is losing the Opportunity to sell the taxi by holding with his business. That is owning and operating the independent business so the opportunity cost would be $39,000.

b)

Working as an Independent -

Earnings when working as an independent - $31,500

Working as a Dispatcher -

Earnings from Dispatcher = $30,000

Add: Investment Income ($39,000*9/100) = $3,510

Total Earnings = $35,510

Yes, Mr. Dowd should sell the taxi and accept the position as Dispatcher because he can earn more when he is working as a dispatcher.