(A). A potential entrepreneur is trying to decide whether to open a new health spa. She presently makes $35,000 per year as an aerobics instructor and will have to give up this job if she opens the new spa. If she chooses to open spa, it will cost her $200,000 per year in rent and other operating expenses.
1. What are her accounting costs?
2. What are her opportunity costs?
3. How much would she need to make in revenues to earn positive accounting profits? Positive economic profit?
4. If a firm makes positive economic profit it means that the firm earns normal profit. True or false? Comment.
(B). 4. Production function specifies the maximum output that can be produced given varying degrees of technological progress. True or false, explain.
1) Her accounting costs are @200,000. Please not that we have not added or included cost of capital here as no information about the source of capital is given. If the amount to run the business is a borrowed money, interest cost of capital should be included.
2) Opportunity cost in this case will be @35,000. Again, as no information about the capital invested is given, we have not included the opportunity cost of the capital invested. Opportunity cost is the cost of the next best alternative, ie, the amount which ...
Accounting costs, profits, Economics profit