Suppose Kent Clark, who was a manager at the Exquisite Restaurant, decides to open his own restaurant. As a manager at Exquisite, he was making a salary of $85,000, which he will have to give up.
Additionally, he decides to cash in his retirement account, which was now worth $1 million. He was averaging a rate of return of 5 percent on that retirement account. (For simplicity assume no taxes).
He decided to open his restaurant on his property that he was renting out, for which he was getting a rent of $3,000 per month.
Based on the analysis that he has done, he believes that his revenue from the restaurant would be $500,000 and all his expenses (assume no taxes) $330,000.
Based on this information, answer the following questions:
What is his total opportunity-cost?
Show your calculations. Is he making a good decision starting his restaurant? Why or why not?