Sarah earns $41 000 per year working for a large corporation. She is thinking of quitting
this job to work full time in her own business. She will invest her savings of $55 000 (which currently has an
annual 3% rate of return) into the business. Her annual opportunity cost of this new business is

The annual opportunity cost of this new business for Sarah is $42,650.

Step-by-step explanation

The opportunity cost refers to the loss of benefit associated with an alternative when another option, or alternative is chosen by the individual. 

The opportunity cost is present in each and every decision made because the resources present with the economy are limited in nature, and the wants and desires are limitless. 

In the given case, it is given that Sarah earns around $41,000 per year. 

But she is now opting to start her own business and quit this job. 

She will also use her savings for her business which on which she could have earned 3% annual return. 

Her opportunity cost is:

Interest rate forgone + Salary foregone

= (55,000)(3%) + 41,000

= 1650 + 41,000

= 42,650

Hence, the annual opportunity cost of this new business for Sarah is $42,650.