Question

1) To open a new business, a manager must obtain a license from the city for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license. (2 points)

a. What are the firm's fixed costs?

b. Suppose the manager obtains a license but then decides against opening the business. If another firm offers the manager $2,000 for the license, should the manager accept the offer?

Answer 1

Money spent on obtaining license = $20000

It otherwise means that even if the business is not started after getting the license, he has to bear the expense. Also if the business started the money paid on getting the license will not affect the output. At zero level output also it remains same.

a. Hence the firms fixed cost will be 20000.

The license is refundable and $3000 will be refundable in that case. So if at all it is refunded then the firm can recover only $3000. Remaining 17000 will be called as Sunk Cost (irrecoverable cost arise upon closer of a firm).

b) If it is decided not to start the business and sell the license. The offer is of $2000. The firm definitely should not accept this offer because if it is refunding the firm supposed to get $3000. So instead of selling the license he should refund it and get $3000 in the case of not starting of the business.