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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 for Joe's computer software business is \$65,000 and the economic cost is \$139,000.

Step by step solution

01

Identify the Accounting Cost

The accounting cost is the total expense Joe incurred in the first year. Because he paid a salary to himself of \$40,000 and had other expenses of \$25,000, the accounting cost totals \$40,000 + \$25,000 = \$65,000.
02

Identify the Opportunity Cost

Joe quit his job which was paying him \$50,000 per year, and he was also earning \$24,000 per year from renting out the building which he now uses for his own business. Hence, the opportunity cost is the sum of these two amounts, \$50,000 + \$24,000 = \$74,000.
03

Calculate the Economic Cost

The economic cost is the sum of the accounting cost and the opportunity cost. Therefore, it can be calculated as \$65,000 + \$74,000 = \$139,000.

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Most popular questions from this chapter

Suppose that a paving company produces paved parking spaces \((q)\) using a fixed quantity of land \((T)\) and variable quantities of cement (C) and labor (L). The firm is currently paving 1000 parking spaces. The firm's cost of cement is \(\$ 4,000\) per acre covered, and its cost of labor is \(\$ 12 /\) hour. For the quantities of \(C\) and \(L\) that the firm has chosen, \(M P_{C}=50\) and \(M P_{L}=4\) a. Is this firm minimizing its cost of producing parking spaces? How do you know? b. If the firm is not cost-minimizing, how must it alter its choices of \(C\) and \(L\) in order to decrease cost?

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