Question

Amber and Brad own and operate a small grocery store in their town. The store is open for business every day from 7:00 a.m. to 6:00 p.m. They are thinking of opening the store for business an extra hour per day, from 6:00 p.m. to 7:00 p.m. Is this a wise economic decision? Please help this lovely couple with their economic decision. Assume that each month has 30 days. Calculate the marginal costs and benefits for the entire month. Here are some pertinent facts (these are the only facts to consider. Please do not confuse Amber and Brad with any other extraneous information):

1.The monthly rent on the store is $4,000.

2.They pay $1,500 per month to a local bank for a loan they took out a while back to expand the parking lot.

3.They pay a fixed monthly insurance premium of $500 for theft, fire, and liability regardless of the number of hours per day the store is open for business.

4. Amber and Brad could instead work for the government for a combined salary of $7,000 per month.

5. Five years ago they installed new heating, ventilation, and air - conditioning (HVAC) system for $7,000 . Now it is only worth $3,000 in the second - hand market.

6. Two years ago they bought a new refrigeration system for $12,000. It is now worth only $9,000.

7. For each hour that they open the store for business, they have to pay an additional $150 in wages.

8. The cost of electricity and natural gas for cooling and heating, as well as the water bill is $50 per hour.

9. The costs of grocery stuff (such as sodas, cereals, vegetables) that they need to buy to satisfy demand during those additional hours is $6,000 per month .

10. Amber gives viola lessons in the neighboring youth center every day from 6:00 p.m. to 7:00 p.m., which she needs to give up if they open the store an extra hour per day. She makes $40 per hour for those lessons.

11. Capital (such as the refrigerators and the HVAC system) lose value at a rate of $60 per business hour (this is called depreciation).

12. If they open the store for business an extra hour per day, their total monthly revenue will increase by $25,000 (revenue is the money received from customers before subtracting out the costs).

I have to find explicit monthly cost, implicit monthly cost, total fixed cost, sunk cost, explicit marginal cost, implicit marginal cost,

Answer 1

Explicit Cost= Monthly Rent+Money paid to bank+Insurance for fire and theft+ wages+ Cost of electricity+ Cost of grocery stuff.

Explicit cost = 4000+ 1500+500+49500+ 16500+198000 = 270000.

Implicit monthly cost = Salary from working with government+depreciation

Implicit cost = 7000+19800 = 26800

Total Fixed cost = Cost of HVAC system + New refrigerator = 7000+12000 = 19000

Explicit marginal cost = Wages for an additional hour+ Cost of electricity for an additional hour +Cost of grocery stuff

Explicit marginal cost = 4500+1500+6000 = 12000

Implicit marginal cost = Income lost as a teacher

Implicit marginal cost = 1200