Question

2. Huang is operating a dental business in Pleasant Hill. He hires a dentist for $70,000 per year and hires a clerk on the counter for $30,000 per year. He owns his own land and dental office. He could have rented it out at $20,000 a year. He pays utility fees for water, electricity, and sewage, $5,000 a year. He pays a business licensing fee of $1,000 per year. He borrows $6,000 from the bank to pay for labor and utility fee, and business licensing fee with annual interest rate of 3% and uses $100,000 from his saving account with annual interest rate of 2%. The value of dental office declines per year by $1,000. He could have worked as a dental hygienist instead of dental office manager and could have received $50,000. He earned $120,000 a year by operating a dental business. (7 points)

1) Calculate his annual explicit cost and implicit cost. (2 points)

Answer 1

Annual Explicit Costs:

Cost of hiring dentist = $70,000

Cost of hiring clerk = $30,000

Business licensing fee = $1,000

Utility fee = $5,000

Cost of borrowing $6,000 from the bank at an interest rate of 3% per year = 0.03 * $6,000 = $180

Depreciation in the value of dental office = $1,000

Annual Explicit costs = $70,000 + $30,000 + $1,000 + $5,000 + $180 + $1,000 = $107,180

Annual Implicit Costs:

Rent that would have been received otherwise = $20,000

Forgone interest on the savings(on $100,000 at an interest rate of 2%) = 0.02 * $100,000 = $2,000

Forgone salary (as a dental hygienist) = $50,000

Annual Implict Cost = $20,000 + $2,000 + $50,000 = $72,000