Question

Sarah owns and runs a house cleaning business. Indicate whether her business incurs a cost (and what type of cost) in each of the following cases! • She uses her business account to pay employee wages: • She quit another job to run the business and decided not alary to save on expenses: explicit cost She uses her own savings to finance her business expen implicit cost borrowing money and paying interest to the bank: not a cost She uses her own car to travel to clients. She receives a l... ve from the business account for that use: • She likes drinking Starbucks coffee every day. She uses her own funds to buy Starbucks coffee during work hours: Check

Answer 1

1.

a. Explicit cost, wages are explicit cost

b. Implicit cost, forgone salary from previous job is implicit cost

c. Implicit cost, forgone interest on savings is implicit cost

d. Explicit cost, traveling expenses are explicit cost

e. Not a cost. She uses her own funds, so not a cost to business

2.

TC = VC + FC

MC = Change in TC / Change in Q

AVC = VC /Q

AFC = FC / Q

ATC =TC / Q = AFC + AVC

When Q =10, FC = 40

When Q =20, VC = 130 - 40 = 90, therefore AVC = 90 / 20 = 4.5

When Q =30, TC = 150 + 40 = 190, MC = (190-130) / (30-20) = 6

When Q =40, AFC = 40/40 = 1, ATC = 1+7 = 8