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Chapter 7: Q1. (page 280)

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鈥檚 computer software business.

Short Answer

Expert verified

The accounting cost in the first year of Joe鈥檚 computer software business is $65,000.

The economic cost in the first year of Joe鈥檚 software business is $99,000.

Step by step solution

01

Calculating accounting cost in the first year of Joe’s business

Step 2: Calculating economic cost in first year of Joe鈥檚 business The nominal amount deducted from the revenue is the accounting cost.

Since Joe provides himself a salary of $40,000 per year and other expenses on production for $25000 per year, the accounting cost is:

Accounting Cost = Salary + Other Expenses

Accounting Cost = $40,000 + $25,000

Accounting cost = $65,000

Thus, the accounting cost for Joe鈥檚 software business is $65,000 per year.

02

Calculating economic cost in the first year of Joe’s business

Economic cost includes all the explicit and implicit costs. The costs included in the economic cost other than the accounting cost are fixed and variable costs, marginal cost, average cost, short-run cost, long-run cost, and opportunity cost.

Economic Cost = Salary + Other Expenses + Opportunity Cost (Rent + Forgone Salary)

Economic Cost = $40,000 + $25,000 + $24,000 + $10,000

Economic Cost = $99,000

Thus, the economic cost involved with Joe鈥檚 business is $99,000.

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The short-run cost function of a company is given by the equation TC = 200 + 55q, where TC is the total cost and q is the total quantity of output, both measured in thousands.

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