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
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
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 ...
This solution shows the difference between accounting profit and economic profit, and how to calculate average product of labour and marginal product of labour.
Managerial Economics, Profits and Various Costs Calculations
1. ABC Corp. owns a piece of land and building a few miles from its headquarters. The land originally cost ABC $500,000 to purchase. ABC is considering using the facility for a new training program. It could also rent a building about the same distance from its headquarters for $20,000 a year. A developer has offered ABC $2.5 million for its property. What factors should ABC consider when deciding whether or not to use its own facility or to sell it and rent the other building? What would you recommend?
2. You have worked as a real estate agent for 10 years and are earning about $100,000 per year with your current agency. You prepared the following information to use in evaluating the financial feasibility of starting your own agency:
Revenues generated during the first year of operations: $1.5 million
Salaries and other labor costs paid to employees during the first year of operations: $1 million
Operating expenses (e.g., rent, communications: $150,000
Equipment purchases: $100,000 with a 5 year straight line depreciation
You need $100,000 in equity, which you can withdraw from your bank account that is currently paying 2% per year in interest, and a $400,000 loan with a 15% interest rate.
a. What is your expected pretax accounting profit from your proposed agency?
b. What is your expected pretax economic profit from your proposed agency?
c. Identify the explicit versus implicit costs.
3. Complete the following table using your understanding of the relationship among the various costs.
Output TC FC VC ATC AFC AVC MC
0 125 0