BUS 640 – Managerial Economics
1. Title Opportunity Costs
When Burton Cummings graduated with honors from the Canadian Trucking Academy, his
father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow
truckers that his revenues were typically $25,000 per month, while his operating costs (fuel,
maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs
identical to Burton’s rig rent for $15,000 per month. If Burton was driving trucks for one of
the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact
that he is generating a net cash flow of $7,000 ($25,000 — $18,000) per month, since he
would be earning only $5,000 per month if he were working for a trucking firm.
Compute both Burton Cummings’s explicit costs per month and his implicit costs per
Explicit costs are defined by Thomas and Maurice (2011) as the monetary opportunity costs
of using market-supplied resources (p 9). Burton Cummings
explicit costs are $18,000
, implicit costs are $7,000
(revenue – operating costs). Thomas and Maurice
describe these costs as nonmonetary opportunity costs of using owner-supplied resources
(2011, p 9).
Compute the opportunity cost of the resources used by Burton Cummings each month.
Opportunity costs are described by Thomas and Maurice as what a firm’s owners give up to
use resources to produce goods or services (2011, p 8). Burton Cummings
each month are $13,000
He currently nets $7,000 (revenue – expense) and he has an
opportunity to net $20,000 ($5,000 salary + $15,000 rental income + 0 expenses = $20,000.
Thus, the difference
What advice would you give Burton Cummings? Explain your advice in terms of
I would advise Burton Cummings to remain employed and bringing in a salary. This income,
coupled with the rental income from renting out his tractor-trailer will bring in substantially
higher revenue because he has zero payout for operating costs (since his employer would be
absorbing the operating costs of the rig he was employed to drive). The only unknown factor,
which would affect his opportunity cost, would be the maintenance and depreciation costs
that he would incur as an owner of the rig he rented out.
Thomas, C. & Maurice, S. (2011).
Foundations of business analysis and
(10th ed.). New York: McGraw-Hill.
Supply and Demand
The Wall Street Journal reported that recent law school graduates were having a very difficult time
obtaining jobs in the legal profession. Many law schools said that 10 to 20 percent of their graduates still
had not found jobs. The historical average had been 6 to 8 percent. Many recent graduates were taking