Econ

Technical Problems

1.

A. Explicit cost of $6,000 per year. Firm forgoes $6,000 per year to obtain the use of the computer server.

B. Implicit cost of $5,000 per year. Owner forgoes earning $5,000 (10% x $50,000) annually by letting the firm use the money rather than investing it and earning a return.

C. Implicit cost of $3 million per year. The owner could sell the building and invest the proceeds to earn 10% annually. The owner sacrifices $3 million (10% x $30 Million) annually.

D. Explicit cost of $5 million this year. The owner must pay the computer programmers $50 per hour for 100,000 hours. So the owner gives up $5 million ($50 x 100,000) to hire the programmers.

E. No cost. The incinerator has zero market value since no other firm pays anything to have it. Nothing is given by the owner to keep the incinerator and opportunity cost is zero.

2.

A. The explicit costs of the firm are $80,000. The implicit costs are $70,000. Total economic cost is $150,000.

B. The firm earns economic profit of $25,000.

C. The firm's accounting profit is $95,000.

D. If the owners could earn 20% annually on the money they have invested in the firm, the economic profit of the firm would be $-5,000 (when revenue is $175,000).

Applied Problem 3

A. Burton's explicit costs are $18,000 per month. His implicit costs are $20,000 per month ($15,000 + $5,000)

B. Opportunity cost = explicit cost + implicit cost = $18,000 + $20,000 = $38,000 per month.

C. The cost of production for Burton Cummings is $38,000 per month. This exceeds his revenues by $13,000 ($38,000 - $25,000). Instead of Burton losing the $13,000 per month, he might want to rent his tractor-trailer, which will earn him $15,000 per month. He then could drive for another firm and earn $5,000 per month. If he does this, he could earn $20,000 per month.