Question

1. Jack quits his $200,000 a year job at Doctors Medical Center in order to set up a Graduate College of Science and Technology. He invests his savings of $150,000 (which had been earning 2 percent a year) in starting the College. He also borrowed $700,000 from the Bank of the East at 5 percent interest a year. Jack located his College in a building he owned and had previously been renting to Car Dealers Inc. for $120,000. Jack estimates his entrepreneurial talent to be worth $75,000. During the year, he paid faculty salaries of $600,000, administrative and other staff salaries totaling $300,000, miscellaneous expenses of $75,000, and miscellaneous supplies of $35,000. Jack earned tuition fees of $ 1,850,000. Based on the above data, at the end of the year, Jack's: Economic costs are $ His explicit costs are $ His implicit costs are $_ His economic (profit, loss) is $ His accounting costs are $ His accounting (profit, loss) is $

Answer 1

Implicit cost is the value imputed on self owned factors and services. There is no monetary payment on these costs. Explicit cost is the cost on hired or purchased factors and services. There is a flow of money payment on these costs.

Economic cost= Implicit cost+ Explicit cost.

Economic profit is Total Revenue – Total cost (implicit + explicit cost)

Accounting profit is Total Revenue – Explicit cost.

Implicit cost of Jack.

Value of self owned services at Graduate college of science and technology (Opportunity cost of quitting the earlier job) = $200,000.

Value of his savings invested for the college = $3000(2% of $150,000)

The imputed rent of own building = $120,000

The imputed value on entrepreneurial ability= $75,000

Thus Jack’s total implicit cost = $398,000

Explicit cost of Jack.

Interest on borrowed fund= $35000(5% of $7,00000)

Faculty salaries = $600,000

Administrative and other staff salaries = $300,000

Miscellaneous expenses = $75,000

Miscellaneous supplies = $35,000.

Thus Jack’s total explicit cost = $1045000

Jack’s total revenue (Tuition fees) =$ 1,850,000

Answers:

1. Jack’s economic costs are $144,3000

2. His explicit costs are = $1045000

3. His implicit costs are= 398,000

4. His economic (profit/loss) is $407,000($1,850,000- $398,000+$1045000)

5. His accounting costs are $1045000.

6. His accounting (profit/loss) is $805000(1,850,000−$1045000)