Problem Set 6 Solutions
Ch 7, Problem 7.2
A grocery shop is owned by Mr. Moore and has the following statement of
revenues and costs:
Mr. Moore’s salary
Mr. Moore always has the option of closing down his shop and renting out the
. Also, Mr. Moore himself has job offers at a local supermarket
at a salary of
and at a nearby restaurant at
. He can only work
one job, though. What are the shop’s accounting costs? What are Mr. Moore’s
economic costs? Should Mr. Moore shut down his shop?
The accounting costs are simply the sum: $25,000 + $6,000 + $75,000 + $80,000 =
The economic costs also include the opportunity cost of the land rental ($100,000)
salary Mr. Moore would earn if he selected his next best alternative
($95,000 - $80,000 = $15,000). So, the economic costs are $186,000 + $100,000 +
$15,000 = $301,000.
Should Mr. Moore shut down his shop? His economic costs exceed his revenues by
$301,000 - $250,000 = $51,000. Since his economic costs are greater than his
revenues, he should shut down his shop.