Hi k9queen!!
a)What are Alice's total explicit costs?
The Explicit Costs are the input costs that require an outlay of money
by the firm, they are the actual payments to factors of production.
In this case:
-She has one assistant working for her who she pays $60,000 a year.
-She has various office expenses that she pays from her checking
account. These expenses total up to $30,000 per year.
So the Total Explicit Costs per year are:
Explicit Costs = $60,000 + $30,000 = $90,000
---------------------------------------------------------
b)What are Alice's total implicit costs?
The Implicit Costs are the input costs that don't require an outlay of
money by the firm but involve a cost because they are the opportunity
costs of the resources provided by the firm's owner.
In this case:
-She uses her own time. She does not pay herself a salary but instead
takes whatever is left over. She is a CPA and before strating her own
business was making $175,000 a year, working the same number of hours
as she does running her own business.
-She owns the building that she uses for office space for her
business. Before she opened up her own business she was renting out
the office space for $90,000 a year.
So the Total Implicit Costs per year are:
Implicit Costs = $175,000 + $90,000 = $265,000
---------------------------------------------------------
c)What is Alice's accounting profit equal to?
Accounting profit is total revenue less total explicit costs.
Accounting Profits = Total Revenue - Explicit Costs =
= $350,000 - $90,000 =
= $260,000
----------------------------------------------------------
d)What is Alice's economic profit equal to?
Economic profit is total revenue less total explicit and implicit
costs. Also can be expressed as Accounting Profits less Implicit
Costs.
Economic profits = Total Revenue - (Explicit Costs+Implicit Costs)
= $350,000 - ($90,000 + 265,000) =
= -$5,000
This means that Alice was made an economic loss of $5,000.
----------------------------------------------------------
e)Assume that the salary she had to pay her assistant went up by
$20,000. What would be the affect of this upon her accounting profits
and her economic profits? Explain.
In this new case both Accounting and Economic profits will decrease
because now she incurs in more expenses (in this case more Explicits
costs).
The new Accounting Profits are equal to the old Accounting profit less
$20,000 (the amount of money that the explicit costs rise):
New Accounting Profits = $260,000 - $20,000 =
= $240,000
The new Economic Profits are equal to the old Economic profit less
$20,000 (the amount of money that the explicit costs rise):
New Economic Profits = -$5,000 - $20,000 =
= -$25,000
The economic loss increased from $5,000 to $25,000.
----------------------------------------------------------
Assume that there is an increase in the demand for office space in the
city Alice is located. As a result of this, the rent on a building
such as the one she owns has gone up to $150,000.
---------------------
Note: I will consider parts f) and g) independent from the part e),
that is I will no consider the salary rise for Alice's assistant. If
this not the intention of the problem, let me know and I will redo
these parts as a clarification. The concepts involved are the same and
they are showed more clearly without the salary rise.
----------------------
f)What does this do to her accounting profits? Explain.
In this case the change in the demand for office space and the
consequent increase of the prices of office space renting implies an
increment of the opportunity costs for Alice, that is an increment of
the Implicit cost only.
So the Accounting Profits are not affected by the increase in the
demand for office space.
------------------------------------
g)What does this do to her economic profits? Explain.
In this case the change in the demand for office space and the
consequent increase of the prices of office space renting implies an
increment of the opportunity costs for Alice, that is an increment of
the Implicit cost only.
The Economic Profits are affected by a change in the Implicit costs,
so the increase in the demand for office space implies a change in
Economic Profits (we have more Implicit costs, so we will have less
Economic profits or more Economic loss).
New Implicit costs = $175,000 + $150,000 = $325,000
Explicit Costs = $60,000 + $30,000 = $90,000
Total Revenue = $350,000
Economic Profits = $350,000 -($90,000 + $325,000)
= -$65,000
The new economic loss is $65,000.
----------------------------------------------------------´
Note about Economic loss (or negative economic profits):
As you have seen the Economic Profits depends also on the Implicit or
Opportunity costs of the resources provided by the Alice. These cost
are the cost that Alice gives up for running her own business.
Considering the original problem, in the same period (a year) Alice
left to earn $175,000 of her old job and $90,000 for renting out the
office space, that is a total of $265,000. That means if Alice does
not run her own business she will earn at the end of the year a total
of $265,000. But she decides to run her own business so she will earn
at the end of the year the Accounting Profits, that are $260,000,
$5,000 less than if she continuing working and rent the office space.
Then we say that she was made an economic loss of $5,000 (or in more
general way she was made a bad economic choice).
---------------------------------------------------------
I hope this helps you. If you need a clarification, please post a
request for it before rate this answer.
Best Regards.
livioflores-ga |
