Question

When Joe Foote graduated with honors from Trans American Technical Institute in Jeremyn, PA, his dad gave him a $350,000 tractor-trailer rig. Recently, Joe was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, insurance, maintenance, and depreciation) amounted to only $18,000 per month. a. How much are Joe’s explicit costs per month? How much are his implicit costs per month? b. What is the dollar amount of the opportunity cost of the resources used by Joe Foote each month? c. Jim is proud of the fact that he is generating a net cash flow of $7,000 (=$25,000 - $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm. What advice would you give Jim Foote?

Answer 1

A) His explicit costs amount to $18,000 per month and the implicit cost is the cost of tractor $350,000/12= $29,166.66

B) His implicit and explicit dollar amount of resources used are $47,166.66 and cost of the next best alternative where he would have worked if he would not have been driving his tractor.

C)His costs are much more than the revenue he is earning. Would advise him to either increase his revenue sales or work for the trucking firm which will give him $5,000. Currently, he is making losses since his total costs are much higher than the total revenue earned.