Assume that I have decided to start your own Internet business to sell cookbooks online (justcookbooks.com). I estimate that the annual cost of this business in the first year will be as follows:
Fixed explicit costs (annually):
- Technology (Web design and maintenance) $5,000
- Postage and handling $1,000
- Miscellaneous $5,000
- Equipment $4,000
- Overhead $1,000
TOTAL Explicit Fixed Costs (annual) $16,000
Fixed implicit costs (annually):
- Lost wages from job given up (annual) $50,000
Variable cost = $20 per book.
Assume that the equation for demand is Q = 40,000 - 500P, where
- Q = the number of cookbooks sold per year
- P = the retail price of books
- Why, according to an economist, should implicit costs (i.e., lost wages from job given up) be included in the total cost of your product to compute economic profit?
- Why does price elasticity of demand change as you move up the demand curve (more specifically, as the price of the product increases)?
- Explain why MR = MC produces maximum profit for a company.