Unit2

Sandy owns a firm with annual revenue of $1 million. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur, Sandy could get a job with an annual salary of $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit as a firm owner. a)$100,000 b)$50,000 c)$0 d)$150,000

d)$150,000

Larry has decided to quit his job working at Quickie lube and become an entrepreneur. He had been earning $2,500 per month performing oil changes. Since he has his own garage, which he had been renting out for $400 per month, he has decided to open his own oil changing business. His monthly costs and revenue are shown in the following list. Note: we are assuming no depreciation. Price of oil change = $25 Oil changes per month = 200 Cost of oil = $5 per oil change Equipment rental = $200 per month Other expenses = $1,000 per month 1 What is Larry s total revenue for the month? 2 What are Larry s explicit costs for the month? 3 If an accountant figured Larry s profit, what would it equal? 4 What costs does Larry have that are not considered by the accountant? 5 If an economist calculated Larry s profit, what would it equal?

1. What is Larry's total revenue for the month? P × Q = $25 × 200 = $5,000 2. What are Larry's explicit costs for the month? Oil = $5 × 200 = $1,000, rental = $200, other = $1,000; TOTAL = $2,200. 3. If an accountant figured Larry's profit, what would it equal? TR-TC [explicit] = $5,000 --$2,200 = $ 4. What costs does Larry have that are not considered by the accountant? implicit costs: His forgone earnings = $2,500 + his forgone garage rental = $400 = $2,900 5. If an economist calculated Larry's profit, what would it equal? TR-TC [explicit and implicit] = $5,000 --[$2,200 + $2,900] = $5,000 --$5,100 = --$

Suppose Adam wants to start a bakery. He can either take a loan of $5000 with an interest rate of 5% or he can invest $5000 that he had in the bank. If he had left the money in the bank, he would have earned $250 in interest. What is the implicit cost of using the money from his bank account?

This $250 is the implicit cost of capital the income the owner of the capital could have earned if the capital had been employed in its next best alternative use.

All of the following are considered implicit costs, except: a) paying rent on an existing building. b) interest that could have been earned from the savings account if the money were not used on the existing business. c) the wages the entrepreneur could have earned if he or she chose to pursue a career in corporate America. d) forgone entrepreneurial income.

a) paying rent on an existing building.

Suppose Bob has a part time, car washing business. He has washed nine cars on a given day; the marginal benefit of washing the tenth car is $20 and the marginal cost is $12. Bob should: a. wash the tenth car. b. not wash the tenth car. c. increase his marginal benefit. d. There is not enough information to decide.

a. wash the tenth car.

Suppose Adam wants to start a bakery. He can either take a loan of $ 5000 with an interest rate of 5 % or he can invest 5000 that he had in the bank. If he had left the money in the bank, he would have earned $ 250 in interest. Assume his revenue from the bakery is $ 8000 Assuming he uses his own funds , the accounting profit is $______ and the economic profit is $ ______. a. 2750 ; 3000 b. 3000 ; 2750 c. 3000 ; 3000 d. 2750 ; 2750

b. 3000 ; 2750 Calculate the accounting profit if he takes a loan: 8000−5000−5100×5000=$2750 Calculate the economic profit if he takes a loan: 8000−5000−5100×5000=$2750

You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. What is your best a.Continue operating the bike store because your economic profit from doing so is$80000 b. Continue operating the bike store because your accounting profit from doing so is $80000 c.Become an accountant because your economic profit from doing so is $10,000. d. Become an accountant because your accounting profit from doing so is $10,000.

c.Become an accountant because your economic profit from doing so is $10,000.