Question

1. A currently employed woman, working for $40,000 per year is considering opening her own business. She estimates that renting a space will cost her $30,000 per year; hiring a part-time employee will cost her $20,000 per year; purchasing equipment will cost $70,000; and other out-of-pocket expenses will come to $30,000. She estimates that her total revenues will be $170,000 per year.

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

b. How much would the accounting profits be?

c. The implicit costs?

d. Should she open own business? Why?

Answer 1

a) Explicit cost = Rent + Employee salary + Equipment cost + out-of-pocket expenses

= 30,000 + 20,000 + 70,000 + 30,000

= $150,000

b) Accounting profit = Revenue - Explicit cost

= 170,000 - 150,000

= $20,000

c) Implicit cost = Salary she forgone for openeing her own business

= $40,000

d) No, she should not open own business because the accounting profit is less than her implicit cost so if she continue to work she get $40,000 while if she open her own business it cost her economic loss of $20,000.

Economic profit = Accounting profit - Implicit cost

= 20,000 - 40,000

= -20,000 { negative sihgn means economic loss}

So she should not open her own business due to the economic loss of 20,000.