Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 7: Problem 1

Joe quits his computer programming job, where he was earning a salary of \(\$ 50,000\) per year, to start his own computer software business in a building that he owns and was previously renting out for \(\$ 24,000\) per year. In his first year of business he has the following expenses: salary paid to himself, \(\$ 40,000 ;\) rent, \(\$ 0 ;\) other expenses, \(\$ 25,000 .\) Find the accounting cost and the economic cost associated with Joe's computer software business.

Short Answer

Expert verified
The accounting cost associated with Joe's computer software business is $65,000 and the economic cost is $139,000.

Step by step solution

01

Calculate Accounting Cost

First, identify the different expenses incurred during the first year of Joe's business. This includes salary paid to himself: \( $40,000 \), rent: \( $0 \) (since he owns the building), and other operating expenses: \( $25,000 \). Add all these expenses to obtain the accounting cost: \( $40,000 + $0 + $25,000 = $65,000 \).
02

Determine Opportunity Cost

Next, determine the opportunity costs, which refers to the loss of potential gain from other alternatives when one alternative is chosen. In this case, it would be the salary Joe was making at his former job (\( $ 50,000 \)) plus the annual rent he is foregoing by using the building himself instead of renting it out (\( $ 24,000 \)). So, the opportunity cost is: \( $50,000 + $24,000 = $74,000 \).
03

Calculate Economic Cost

Finally, the economic cost is the total of the accounting cost and the opportunity cost. So, add the accounting cost calculated in Step 1 to the opportunity cost from Step 2 to get the economic cost: \( $65,000 (Accounting Cost) + $74,000 (Opportunity Cost) = $139,000 \).

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

A recent issue of Business Week reported the following: During the recent auto sales slump, GM, Ford, and Chrysler decided it was cheaper to sell cars to rental companies at a loss than to lay off workers. That's because closing and reopening plants is expensive, partly because the auto makers' current union contracts obligate them to pay many workers even if they're not working. When the article discusses selling cars "at a loss," is it referring to accounting profit or economic profit? How will the two differ in this case? Explain briefly.

Suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output. a. How does this tax affect the firm's fixed, marginal, and average costs? b. Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firm's fixed, marginal, and average costs?

A chair manufacturer hires its assembly-line labor for \(\$ 30\) an hour and calculates that the rental cost of its machinery is \(\$ 15\) per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 3 hours of labor for each hour of machine time, is it minimizing its costs of production? If so, why? If not, how can it improve the situation? Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the optimal combination of labor and capital.

Suppose the economy takes a downturn, and that labor costs fall by 50 percent and are expected to stay at that level for a long time. Show graphically how this change in the relative price of labor and capital affects the firm's expansion path.

A computer company's cost function, which relates its average cost of production AC to its cumulative output in thousands of computers \(Q\) and its plant size in terms of thousands of computers produced per year \(q\) (within the production range of 10,000 to 50,000 computers \(),\) is given by \\[ \mathrm{AC}=10-0.1 \mathrm{Q}+0.3 \mathrm{q} \\] a. Is there a learning-curve effect? b. Are there economies or diseconomies of scale? c. During its existence, the firm has produced a total of 40,000 computers and is producing 10,000 computers this year. Next year it plans to increase production to 12,000 computers. Will its average cost of production increase or decrease? Explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free