Answer to Question #71512 in Microeconomics for Kelvin Ansong

Question

Until recently,you worked for a software development firm at a yearly salary of $35000.Now you decide to open your business. You quit your job,cash in $10000 savings account at a 5% interest and use the money to buy computer hardware to use in your business. You also convert a basement apartment in your house, which you have been renting for $250 a month into your workplace for your new software firm. You lease some office equipment for $3600 a year and hire two part time programmers whose combined salary is $25000 a year. Cost of providing heat and light is $50 a month. What are the total annual explicit costs of your new business? What are the total annual implicit costs? At the end of your first year,your accountant informs you that your total sales for the year amounted to $55000. She congratulates you on a profitable year. Are her congratulations warranted. Why or why not?

Answer 1

Total annual explicit costs are
$3600+$25000+$50*12+$10000=$39200
Total annual implicit costs are
$35000+$10000*0.05+$250*12=$38500
Accounting profit is
$55000-$39200=$15800
Economic profit (loss) is
$15800-$38500=-22700
So, congratulations are not warranted.