Question

# 2. Huang is operating a dental business in Pleasant Hill. He hires a dentist for \$70,000...

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)

Annual Explicit Costs:

Cost of hiring dentist = \$70,000

Cost of hiring clerk = \$30,000

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