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# Implicit and explicit costs, Demand/supply curves

Please see the attached file for complete Problems. Work done with the help of equation writer may not print here.

1.Less is a computer programmer who earned \$35,000 in 1999. But with the new
millennium, Lee decided to try a new career. He loves water sports, and in 2000 he opened a body board manufacturing business. At the end of the first year of operation, he submitted the following information to his accountant:

i.He stopped renting out his seaside cottage for \$3,500 a year and used it as his factory.
ii.He spent \$50,000 on materials, phone, utilities, and the like.
iii.He leased machines for \$10,000 a year
iv.He paid \$15,000 in wages
v.He used \$10,000 from his savings account at the bank, which pays 5 percent a year interest.
vi.He borrowed \$40,000 at 10 percent a year from the bank.
vii.He sold \$160,000 worth of body boards.

a. Calculate Lee's explicit costs.
b. Calculate Lee's implicit costs.
c. What does the accountant calculate for Lee's profit?
d. Calculate Lee's economic profit.

2. Suppose we are analyzing the market for hot chocolate. What will be the impact on
the equilibrium price and quantity of each of the following events affecting the hot
chocolate market? Explain why by providing a verbal description of the adjustment
process (You are not required to provide graphical sketches, but you can if you desire
to do so). Assume that the equilibrium price and quantity are determined by the forces
of supply and demand (that is, the government does not play any role in the process)
a. winter starts and the weather turns sharply colder
b. the price of coffee falls
c. the price of whipped cream falls
d. the price of cocoa beans increases
e. consumer income falls because of a recession
f. the Surgeon General of the U.S. announces that hot chocolate cures acne
g. population increases
h. a better method of harvesting cocoa beans is introduced

3. The generalized demand and supply functions for good A are estimated to be, respectively:

where is quantity demanded per month, is quantity supplied per month, P is price of good A, M is average household income, and is the price of a related good R Assume the following values of the shift variables: M = \$42,500, and = \$30.
a. From the demand equation what can you infer about the nature (inferior, normal) of the good A, and its relations with good R. Explain.
b.Given the demand and supply relations, what is the equilibrium price and quantity in this market.
c.If the current price of the product is \$150
(i)What is the quantity supplied and the quantity demanded?
(ii)How would you describe this situation? And what would you expect to happen in this market?

#### Solution Preview

Please see the attached file for complete solution. Work done with the help of equation writer may not print here.

Solution 1

a. Calculate Lee's explicit costs.

Explicit Costs are

Costs of materials, phones, utilities and like = \$50,000
Machine lease amount = \$10000
Wages = \$15000
Interest paid to bank = 40000*10% = \$4000
Total explicit costs are = 50000+10000+15000+4000 = \$79000

b. Calculate Lee's implicit costs.
Implicit Costs are
Rent on seaside cottage = \$3500
Internet loss on his saving account =10000*5% = \$500
Wage loss for not working as programmer = \$35000
Total implicit costs =3500+500+35000 = \$39000

c. What does the accountant calculate for Lee's profit?

Lee's accountable profit is
= Total Revenue - Explicit Costs
=\$160,000-\$79000
=\$81000

d. Calculate Lee's economic profit.

Total Costs = Explicit Costs + Implicit Costs
= \$79000+\$39000
=118000
Economic Profit = Total Revenue - Total Costs
= \$160000-\$118000
= \$42000

Solution 2
a. winter starts and the ...

#### Solution Summary

There are three problems.
Solution to first problem explains the steps in calculating implicit & explicit costs, accouting profit and economic profit for given situation.
Solution to second problem is about studying effect of various mentioned causes on demand supply scenario of hot chocolate.
Solution to third problem explains the steps involved in determining equilibrium point for given demand and supply function. It also studies the market behaviour at a given price level.

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