Question

When Burton Cummings graduated with honors from the Canadian Trucking Academy, he set up his own delivery/courier business (like FEDEX). He transports goods in a $240,000 truck that he bought with his own money. The discount rate is 10% per annum. Burton’s revenues are typically $25,000 per month, while his operating costs are $9,000 per month. If Burton worked for the competition, he would earn $14,000 per month.

Using the above information, complete the below statements, filling in your final, complete answer in the space provided to the right of the statement.

a.) Burton’s explicit costs each month are equal to

b.) Burton’s implicit costs each month are equal to

c.) Burton’s opportunity costs each month are equal to

d.) Burton's accounting profit each month is equal to

e.) Burton's economic profit each month is equal to

f.) If someone offered to buy Burton's business, he should

g.) Burton would base his decision to f.) on his

Answer 1

a) Explicit Costs

= Operating Costs

= $9000

b) Implicit Costs

= Money earned if worked for Competition + Interest on own money

= $14000 + 10% of 240000 = $14000 + $24000 = $38000

c) Opportunity Costs

= Explicit Costs + Implicit Costs

= $9000 + $38000 = $47000

d) Accounting Profit

= Total Revenue - Explicit Costs

= $25000 - $9000 = $16000

e) Economic Profit

Total Revenue - Explicit Costs - Implicit Costs

= $25000 - $9000 - $38000 = -$22000

He is incurring Economic loss. So, it is better he should sell his business.