Question

) Jane quit her job at IBM where she earned $150,000 a year. She cashed in $90,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 2000 people who will pay $300 a year each for the commuter service; $200 from each person goes for gas, maintenance, insurance, depreciation, etc.

(a) (6 points-2 points each) Complete the following questions:

     (1) What are Jane’s total revenues?

     (2) What are Jane’s explicit costs?

     (3) What is her accounting profit?

             

(b) (4 points-1 point for each listing each of the 2 implicit costs; 2 points for total implicit costs) List two important implicit costs that Jane has not included at this point. What is the total implicit cost

(c)    (2 points) What is Jane’s pure economic profit (loss)?

Answer 1

(a) (1) What are Jane’s total revenues

Revenue = 2000 x 300 = $600,000

     (2) What are Jane’s explicit costs?

These are the payments made to labor, maintenance etc. Hence explicit cost = 2000 x $200 = $400,000.

     (3) What is her accounting profit?

It is the difference between total revenue and explicit cost = $600,000 - $400,000 = $200,000.

(b) List two important implicit costs that Jane has not included at this point. What is the total implicit cost

Interest foregone + Salary forgone = 90,000*10% + 150,000 = $159,000. This is the total implicit cost.

(c)    (2 points) What is Jane’s pure economic profit (loss)?

It is the revenue – explicit cost – implicit cost = $600,000 - $400,000 - $159,000 = $41,000.