Homework SourseCh 1 During a year of operation a firm collects 300000 in re
Ch 1
During a year of operation, a firm collects $300,000 in revenue and spends $200,000 on labor expense, raw materials, rent, and utilities. The firm’s owner has provided $750,000 of her own money instead of investing the money and earning a 10% annual rate of return.
1- How much are the explicit (accounting) costs, the implicit costs, and the total economic costs?
2 - How much are the firm’s accounting profit and economic profit?
3 - If the owner was working for a full time job with annual salary of $30,000 before she quitted the job to operate the business, do you think she made the right decision from the perspective of long-run economic profit? Please explain your answer briefly.
Ch 3
Twentyfirst Century Electronics has discovered a theft problem at its warehouse and has decided to hire security guards. The firm wants to hire the optimal number of security guards. The following table shows how the number of security guards affects the number of radios stolen per week.
# of security guards # of stolen per week
0 __________ 50
1 __________30
2___________ 20
3___________ 11
4____________ 7
5___________ 4
4 - If each security guard is paid $400 a week and the cost of a stolen radio is $50, how many security guards should the firm hire?
5- If the cost of a stolen radio is $50, what is the most the firm would be willing to pay to hire the first security guard?
6 - If each security guard is paid $400 a week and the cost of a stolen radio is only $30, how many security guards should the firm hire?
Ch 3
Level of Total Total Marginal Marginal Net Activity Benefit Cost Benefit Cost Benefit
_____ 0 xx xx 0
200 30 _____ _____ _____
_____ _____ 100 _____ 230
_____ _____ _____ 50 270
450 _____ _____ 65 _____
_____ 255 30 _____ _____
500 _____ _____ 75 _____
7 - Please answer the following three questions referred to the table: a. What is marginal benefit for the 4th unit of the activity?
8 - What is the net benefit of the 5th unit of the activity?
9 - What is the optimal level of activity?
Solution
Answer 1: Explicit cost is a direct cost associated with running the business. Explicit cost = $2,00,000
Implicit cost is a cost associated with opportunity foregone. It is calculated as follows.
Implicit cost = $7,50,000*(10/100) = $75000
Total economic cost = Explicit cost + Implicit cost
= $2,00,000+$75000= $2,75,000
Answer 2: Firm Accounting profit = Revenue-Expenses =
$3,00,000-$2,00,000= $1,00,000
Firm Economic profit =Revenue - (Explicit +Implicit)
Firm Economic profit = $3,00,000- ( $2,00,000+$75000)
Firm Economic profit = $25000
Answer 3: If person foregone $30,000 salary. Now at present his economic profit = $25000-$30000= -$5000
At present scanerio he is incurred a loss in economic point of view. But in future when business grow and there are large perspective than the long run economic profit because implicit cost remain same. At present scanerio a business man has taken wrong decision but from future perspective his decision right when business grow at rapid speed.
Answer 4: When we analysis additional cost and additional benefit of security guard . We analysis it is better to appoint 3 security guard because appointing additional security guard cost $400 where as benefit from stolen radio is $450 at this level.
Answer 5 : $1000 is the maximum cost that has been paid by the firm to the security guard because it is the maximum cost associated with it. ($50*20)
Answer 6 : If the cost of stolen radio reduced to $30
Than there is 1 security guard has been appointed because adding additional security guard cost more than number of stolen radio. Appointing additional security guard cost is $400 where as benefit associated with it is $300.So it is better to appoint 1 security guard.
