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Managerial economics and accounting

Jim is considering quitting his job and using his savings to start a small business. he expects that his costs will consist of a lease on the building, inventory, wages for two workers, electricity and insurance.
a. identify which costs are explicit and which are opportunity costs
b. identify which costs are fixed and which are variable

2. Jill resigns from her job at which she was earning 50,000 per year and uses her 100,000 savings, on which she was earning 5% interest, to start a business. In the first year, she earns revenue of 150,000 and her costs are as follows
rent 25,000
utilities 12,000
wages 30,000
materials 20,000

a. calculate Jill's accounting profit
b. calculate Jill's economic profit

3. Suppose that a firm's only variable input is labor. When 50 workers are used, the average product of labor is 50, and the marginal product of the 50th worker is 75. the wage rate is 80 and the toal cost of the fixed input is 500

a. What is average variable cost? Show calculations
b. What is marginal cost? Show calculations
c. What is average total cost? Show calculations
d. Is each of the following statements true or false? Explain
1. Marginal cost is increasing
2. Average variable cost is increasing
3. Average total cost is decreasing

Solution Preview

1. a) Explicit costs represent money that Jim must pay. These include the lease, inventory, wages, electricity and insurance. Opportunity costs represent money that Jim forgoes because of his decision to start his business. These include his salary at his job and the interest he could have earned on his savings.
b) Fixed costs will not change from month to month. These include the lease and insurance. Variable ...

Solution Summary

This solution shows the difference between accounting profit and economic profit, and how to calculate average product of labour and marginal product of labour.