PROBLEM 1

For each one of the costs below, explain whether the resource cost is explicit or implicit, and give the annual opportunity cost for each one. Assume the owner of the business can invest money and earn 10 percent annually. a) A computer server to run the firms network is leased for $6,000 per year. Explicit Cost

b) The owner starts the business using $50,000 of cash from a personal savings account. Implicit cost, $5000 c) A building for the business was purchased for $18 million three years ago but is now worth $30 million. Implicit Cost, $30 million

d) Computer programmers cost $30 per hour. The firm will hire 200,000 hours of programmer services this year. Explicit cost, $6million

e)The firm owns a 1955 model Clarke-Owens garbage incinerator, which it uses to dispose of paper and cardboard waste. Even though this type of incinerator is now illegal to use for environmental reasons, the firm can continue to use it because its exempt under a grandfather clause in the law. However, the exemption only applies to the current owner for use until it wears out or is replaced. (The owner offered to give the incinerator to the Smithsonian Institute as a charitable gift, but managers at the Smithsonian turned it down.) No Cost

Problem 2
During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on raw materials, labor expense, utilities and rent. The owners of the firm have provided $500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. Calculate the explicit cost, the implicit cost, the economic cost, the economic profit and the accounting profit.

Explicit cost $80,000.  Implicit cost $70,000.  Economic cost $150,000.  Accounting profit $95,000.  Economic profit $25,000.


If the owners could earn 20 percent annually on the money they have invested in the firm, what would be the economic profit of the firm.

Economic profit - $5000.

Problem 3


Consider an individual who has an MBA degree and is considering investing Rs. 80,00,000 in a garments store that he would manage. The projected statement for the year is as:

Sales : Rs.36,00,000  Cost of goods sold: Rs.16,00,000  Advertising : Rs.8,00,000  Utilities : Rs.1,20,000  Misc. Expenses : Rs.2,80,000


The annual wage return on an MBA degree is Rs. 24,00,000 per year. The prevalent interest rate is 5%.

Calculate the explicit cost, the implicit cost, the economic cost, the economic profit and the accounting profit.

Explicit cost Rs. 28,00,000.  Implicit cost Rs. 28,00,000.  Economic cost Rs. 56,00,000.  Accounting profit Rs.8,00,000.  Economic profit - Rs.20,00,000


Problem 4
A woman managing a photocopying establishment for $ 25,000 per year decides to open her own shop. Her revenue during the 1st year of operation is $ 120,000 and her expenses are as follows:

    

Salaries to hired help Supplies Rent Utilities Interest on bank loan

: $ 45,000 : $ 15,000 : $ 10,000 : $ 1,000 : $ 10,000

Calculate the explicit cost, the implicit cost, the economic profit and the accounting profit.

Explicit cost $81,000  Implicit cost $25,000.  Accounting profit $39,000  Economic profit $14,000