Question

Suppose you are earning $22,000 a year working as a sales representative for a T-shirt manufacturer. At some point you decide to open a retail store of your own to sell T-shirts. You invest $20,000 of savings that has been earning an interest income of $1000 per year. You decide that your new firm will occupy a small store that you currently own and have been renting out for $5000 per year.

A year after you open the store you total up your accounts and find the following:

Total sales revenue……………………………………………………$120,000

Cost of T-shirts……………………………..$40,000

Clerk’s salary……………………………….   18,000

Utilities (bills from hydro, internet, etc.)………5,000

1. What are the total explicit costs?
2. What are the total implicit costs?
3. According to an Accountant, what is your annual profit?
4. What is your annual economic profit?

What does the term elastic demand mean?
A. Quantities demanded which are not very responsive to a change in price.
B. The responsiveness of quantity demanded to a change in price.
C. An elasticity coefficient which is equal to one.
D. Quantities demanded which are quite responsive to a change in price.
E. The responsiveness of price to a change in quantity demanded.

3. Under which of the following situations will total revenue fall?
A. If elasticity is > 1 and price falls..
B. If elasticity is > 1 and price rises.
C. If elasticity is < 1 and price rises.
D. If elasticity is = 1 and price falls.

Answer 1

1.

a. Explicit cost = Cost of T-shirts + Clerk's salary + Utilities

= $ 40,000 + $ 18,000 + $ 5,000

= $ 63,000

b. Implicit cost ( the amount which can be earned otherwise)

  = $ 22,000 + $ 1,000 + $ 5,000

= $ 28,000

c. Accounting profit = Total revenue - Explicit cost

= $ 120,000 - $ 63,000

= $ 57,000

d. Economic profit = Accounting profit - Implicit cost

= $ 57,000 - $ 28,000

= $ 29,000

2. Ans - D) Quantities demanded which are quite responsive to a change in price

3. Ans - B) If elasticity is > 1 and price rises.