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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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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鈥檚 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, MPC = 50 and MPL = 4.

  1. Is this firm minimizing its cost of producing parking spaces? How do you know?

  2. If the firm is not cost-minimizing, how must it alter its choices of C and L in order to decrease cost?

a. Fill in the blanks in the table below.

Units of Output
Fixed Cost
Variable Cost
Total Cost
Marginal Cost
Average Fixed Cost
Average Variable Cost
Average Total Cost
0

100



1

125



2

145



3

157



4

177



5

202



6

236



7

270



8

326



9

398



10

490



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  1. What is the cost function for your plant鈥攏amely, how much would it cost to produce q engines? What are average and marginal costs for producing q engines? How do average costs vary with output?

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