Question

Please do not answer this question if you have already answered it on this website. I’m looking for another independent opinion on this. Use the attached graph to discuss the effects of a reduction of the ‘cost of doing business’ on the equilibrium level of entrepreneurship and on the income premium enjoyed by the entrepreneurs. Provide definitions of ‘cost of doing business’, ‘income premium enjoyed by entrepreneurs’, ‘entrepreneurial opportunity’ and ‘relative supply of entrepreneurs’. If either of the graphs does not shift and stays unchanged, EXPLAIN WHY A REDUCTION OF “cost of doing business” would not affect this line and the line would stay unchanged. Draw any changes/ line shifts to the graph and clearly explain the logic behind these changes. (Please draw a clear graph in your answer with any changes.) On the graph: Wse stands for reward of self-employment; We stands for reward of being employed; SE stands for self-emplyed; E stands for being employed. Please clearly identify increases/decreases in Wse/We rate and SE/E rate.

wse/we Entrepreneurial opportunity Relative supply of entrepreneurs SE/E

Answer 1

Cost of doing business refers to all the expenditure incurred by the firm in producing and selling goods and services. The premium on income enjoyed by the entrepreneurs is referred to as income premium enjoyed by the entrepreneurs. Entrepreneurial opportunity emerges when individual opportunities along with economic and social conditions are considered favorable to create a new product or service. Relative supply of entrepreneurs refers to number of people who are entrepreneurs in relation to total employed persons.

Since low cost of doing business makes the economic conditions more favorable for doing business in the country, the entrepreneurial opportunity curve will shift to right.

The above graph shows a rightward shift of entrepreneurial opportunity curve. This will lead to increase in  Wse/We rate and SE/E rate. . Thus, number of self employed will increase and wages of self employed will also increase.

wse/we Entrepreneurial opportunity Relative supply of entrepreneurs SE/E