microeconomics book solution 9

microeconomics book solution 9 -...

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Solution Making Decisions 1. Hiro owns and operates a small business that provides economic consulting services. During the year he spends $55,000 on travel to clients and other expenses, and the computer that he owns depreciates by $2,000. If he didn’t use the computer, he could sell it and earn yearly interest of $100 on the money created through this sale. Hiro’s total revenue for the year is $100,000. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of $50,000. a. What is Hiro’s accounting profit? b. What is Hiro’s economic profit? c. Should Hiro continue working as a consultant, or should he teach economics instead? 1. a. Hiro’s accounting profit is: $100,000 (total revenue) $55,000 (travel and other expenses) $2,000 (depreciation) $43,000 (accounting profit) Hiro’s economic profit is: $43,000 (accounting profit) $100 (interest forgone) $50,000 (salary as economics professor) $7,100 (economic profit) c. Since Hiro’s economic profit is negative, he would be better off if he didn’t oper- ate the consulting business and taught economics instead. 2. Jackie owns and operates a web-design business. Her computing equipment depreci- ates by $5,000 per year. She runs the business out of a room in her home. If she didn’t use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn’t run her own business, she could return to her previ- ous job at a large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses. a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero? How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an eco- nomic profit of just zero? S-127 9 chapter: S127-S140_Krugman2e_PS_Ch09.qxp 9/16/08 9:21 PM Page S-127
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Solution Solution S-128 CHAPTER 9 MAKING DECISIONS 2. a. Jackie’s accounting profit is: Total revenue $5,000. (The only cost that her accountant would add into the accounting profit calculation is depreciation.) For her accounting profit to be just equal to zero, her total revenue would have to be $5,000. b. Jackie’s economic profit is: Total revenue $5,000 $2,000 $60,000 = Total revenue $67,000. (Depreciation, the opportunity cost of not renting out the room, and the opportunity cost of Jackie’s time are all costs that figure into the calculation of economic profit.) For this to be just equal to zero, Jackie’s total rev- enue would have to be $67,000. 3. You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. How do you explain to your friends that despite making a profit, it
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This note was uploaded on 01/19/2011 for the course ECON 11853 taught by Professor Brianallenhunt during the Spring '10 term at Georgia State University, Atlanta.

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microeconomics book solution 9 -...

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