Question

A currently employed woman, working for $120,000 per year is considering opening her own business. She estimates that renting a space will cost her $50,000 per year; hiring a part-time employee will cost her $25,000 per year; purchasing equipment will cost $30,000; and other out-of-pocket expenses will come to $15,000. She estimates that her total revenues will be $225,000 per year.

a. How much would be the explicit costs of her business be?

b. How much would the accounting costs be?

c. The implicit costs?

d. Should she open own business? Why?

Answer 1

a) Explicit cost will be sum of all the expenses incur by the firm = 50,000 + 25,000 + 30,000 +15,000 = 120,000.

b) The accounting cost and the explicit cost are the same that will also be 120,000.

c) Implicit cost is the opportunity cost of doing the business, that was the job given up, implicit cost in the market is 120,000

d) No„ total profit from the business is 225,000 - 120,000 = 105,000. her profit was 120,000 which is greater than the income earned by business so she shoudn't have opened the business.