1
METU
Department of Economics
Econ 101: Introduction to Economics I
Sections 01-02-03
Fall 2010
PROBLEM SET 5 (With Answers)
PART A – PROBLEMS
1.
The table below represents the annual income statement of Mazlum’s Hardware Store.
Mazlum worked full time at the store. He used $25,000 of his savings to furnish and
stock the store (included in costs). He was recently offered a $20,000 annual salary to
work in an
advertisement agency.
Annual Income Statement
Revenues
Costs
Sales of Merchandise
$90,000
Wholesale purchases
$60,000
Service Revenues
5,000
Store Supplies
2,000
Labor Costs
10,000
Utilities
1,000
Rent
5,000
Depreciation on fixtures
2,000
Total revenues
$95,000
Total Costs
$80,000
a)
Calculate the accounting profits for Mazlum’s Hardware Store.
$95,000-$80,000=$15,000
b)
What are some imputed costs to be taken into account?
Mazlum should include costs of annual interest rate on $25,000 investment
(assuming he could recover it); and $20,000 opportunity cost for his own salary.
c)
If annual
interest rate is 10%, what are the total costs of this business?
Total costs would be accounting costs of $80,000 plus interest of $2,500 and
$20,000 salary.
d)
Calculate the economic profits of Mazlum’s Hardware Store.
A loss of $7,500 is indicated for the past year ($15,000 – $2,500 –$20,000 =
$-7,500)