Question

1. Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs: Their projected revenue depends on the number of lawns serviced. The price per job is $30. The going wage for a typical unskilled college student is about $2,400 for the summer months.

a. Describe an equation for total accounting profit with Q (the number of laws serviced) is a variable?

b. Describe an equation for total economic profit with Q (the number of laws serviced) is a variable? Hint: There are 3 students involved.

c. Should the students launch the business if they expect to service 200 lawn jobs during the summer? Motivate using your equations above.

Answer 1

a) Accounting profit = Total revenue - total cost

= 30Q - 2400.

b) Economic profit = Accounting profit - Implicit cost (which includes the opportunity cost of entrepreneurs' time)

= 30Q - 2400 - 3(2400) [Assuming the the 3 entrepreneurs also earned 2400 by getting involved in some job in summers]

= 30Q - 9600

c) If Q = 200, profit = (30)(200)-2400 = 6000-2400 = 3200.

However, economic profut is negative. Thus, the opportunity cost of three students' time is higher than the profits from lawn care and landscaping business. Hence, they should not launch the bhsiness.