Managerial economics
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Benedictine College
Managerial Economics
Individual Work-1
Unit tutor: Charles Racine
Student name：Yang Chenlong (Kenneth)
Date of issue: August 29th , 2011
Date of submission: September 5th, 2011
I.
During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return.
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 percent 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).
a. Explicit costs (market – supplied resources) = $80,000
Implicit costs (owner – supplied resources) = 50,000 * 14% = $70,000
Total economic cost = explicit costs + implicit costs = $150,000
b. Economic profit = total revenue – total economic costs
= total revenue – explicit costs – implicit costs
= 175,000 – 150, 000 = $25,000
c. Accounting profit = total revenue – explicit costs
= 175,000 – 80,000 = $95,000
d. Economic profit = total revenue – total economic costs
= total revenue – explicit costs – implicit costs
= 175,000 – 80,000 – 500,000 * 20% =$ - 5,000
II.
At the beginning of the year, an audio engineer quit his job and gave up a salary of $175,000 per year in order to start his own business, Sound Devices, Inc. The new company builds, installs, and maintains custom audio equipment for business that requires high-quality audio systems. A partial income statement for Sound Devices, Inc., is shown below:
Revenue 2007 Revenue from sales of product and services…………………………$970,000 Operating costs and expenses
Cost of products and services sold……………………………………355,000 Selling expenses……………………………………………………….155,000
Administrative expenses …………………………..…………………..45,000
Total operating costs and expenses…………………………………$555,000 Income from operations……………………………………………….... $415,000 Interest expense (bank loan)……………..………………………………45,000
Legal expenses to start business…………………………………………28,000 Income taxes……………………………………………………………..165,000
Net income………………………………………………………………. $177,000
To get started, the owner of Sound Devices spent $100,000 of his personnel savings to pay for some of the capital equipment used in the business. In 2007, the owner of Sound Devices could have earned a 15 percent return by investing in stocks of other new businesses with risk levels similar to the risk level at Sound Devices.
a.What are the total explicit, total explicit, and total economic costs in 2007?
b.What is accounting profit in 2007?
c.What is economic profit in 2007?
d.Given your answer in part c, evaluate the owner’s decision to leave his job to start
Sound Devices.
a. Explicit costs = total operating costs and expenses = $555,000
Implicit costs = 100,000 * 15% = $15,000
Total economic costs = explicit cost + implicit costs
= 555,000 + 15,000 = $570,000