Question

Amanda and Bartholomew, a lovely couple with degrees in medicine, own and operate a demonology clinic. The clinic is open for business Monday through Friday from 8:00 a.m. to 5:00 p.m. The thing is, many of their patients work for the government or the private sector and they have to take sick leaves to see the doctors during those days. Since most people do not work in weekends, Amanda and Bartholomew think they could attract many more patients if they open the clinic for business on Saturdays as well. This is because these patients could save some of their sick leaves Is this a wise economic decision? Please help this lovely couple with their economic decision. Assume that each month has 4 weeks or 20 workdays (excluding weekends). Calculate the marginal costs and benefits for the entire month (4 Saturdays). Amanda and Bartholomew are planning to open the clinic on Saturdays only for the next 5 years. This is because they want to make some extra cash to make the payments to the bank less burdensome (see below). Here are some pertinent facts (these are the only facts to consider. Please do not confuse Amanda and Bartholomew with any other extraneous information): 1. Because of its prime location, the monthly rent on the clinic is $5000, regardless of the business. This rent will remain constant for the next number of days the clinic is open for five years. 2. They pay $2,500 per month to a local bank for a loan they took out a while back to buy some state-of-the-art medical equipment. This payment will continue for the next five years They pay a fixed monthly insurance premium of $500 for theft, fire, and things like that. They pay a base liability (malpractice) insurance premium of $5,000 per month that excludes weekend practices. For each Saturday that the clinic is open for business, the couple have to pay an additional $250 in liability insurance premium Instead of running a well-known health management organization (HMO) for a combined monthly salary of S60,000 (yes, you read it right) 3. 4. 5. 6. their own medical business, Amanda and Bartholomew could work for 7. Five years ago, they installed new heating, ventilation, and air-conditioning (HVAC) system with special filters for $10,000. Now it is worth only $3,000 in the second-hand market. 8. Two years ago, they bought new furniture for the waiting room for $8,000.It is now worth 9. For each day that the clinic is open for business, they have to pay $4,000 in wages and 10. The cost of electricity and natural gas for cooling and heating, as well as the water bill is only $5,000 salaries to their staff (the receptionist and technicians). $250 per workday age 1 of 2

Answer 1

The explicit cost is the cost which firms incurred for producing goods or services. Depreciation is an explicit cost but insurance premium is not explicit cost, it is an asset for the firm. Thus, explicit cost = Rent + Depreciation + Electricity charges + Wages = 5000 + (250 times 24) + (200 times 24) + (4000 times 24) = 111800 Note: The depreciation of 7000 $ 3000 is for full year, therefore, is not include in monthly expenses. The implicit cost is the opportunity cost or the income forgone. The implicitly cost = 60,000 + 5000 = 65,000 The fixed cost is the which incurs irrespective of firm is open or close. Fixed cost = Rent + Insurance premium + Depreciation on fixed assets = 5000 + 2500 + 500 + 5000 + 7000 + 3000 = 23,000 Sunk cost is the cost which cannot be recovered . It includes rent, wages, write off value of capital etc.