Question

Prof X is a university professor who is thinking about opening and running her own consulting firm. If she does so, she'll do it full-time, and resign from the university. She estimates the following figures for her consulting firm: annual revenues = $ 210,000; an assistant hired for $60,000 a year; office supplies & utilities at $8,000 a year; she'll have to take out a bank loan of $200,000 (@8% interest per year) for office office equipment & furniture; she'll withdraw $100,000 from her savings in her brokerage account (earning about 7% per year) also for office equipment & furniture; she'll use, as her office, a space at the mall that she now owns, and is currently rented out to someone else for $10,000/year. Her salary at the university is $90,000 per year. And assume that Prof X values her "worry-free weekends" as a prof to be worth $30,000. Prof X is your friend/relative who, upon knowing that you have taken some econ course, is now asking for your advice or help in making her decision/choice: If she goes ahead with her consulting firm, how much are her accounting profits? How much are her economic profits? Based on the answers to these two previous computations, should she go out and be her own boss, or should she stay at the university? Analyze this problem step by step. Critically assess Prof X's choice, by answering the following questions: 1A) In the consulting firm, itemize (with labels, and computations where needed) her explicit costs and her implicit costs. Explicit Costs: Implicit Costs:

Answer 1

Camlin Page Date Explicit costi A) assistant hield 2.60,000 Implicit cost A7%. earring from Sareeing Account ($100000 x740) - $7000 TB). Ceffice supplies $8,000 - 8 utilities c) 8% Interest onloan ($ 2.00000X87) 416000 - B) Reet :- $10000 a year c) _ Salary cet university ) 90,000 • 4000 $ 1,07,000 1B) Accounting profit: Annual Rereenue - Explicit cost = S210,ceo - $ 8uovo -> 9126,000 | Economic profit - Annual Revenue (Explicit cost t - Implicit cost = 4,210,000 - L SEU. co+ 107,017 - $ 210,000 - $ 19.,JUD $19000 LC) | a) Arrudel pzofit to profo x from consulting firm could be $126,000 (b) feetal income If she stayed at the university. her financial + psychic will be :- & financial Income i - salary & earning from sarling 't Rested Income

> $90,000 + $7,000 + ¢10,000 $10700 * Pshy chic Income :- "klorry free weekend worth $30,000 Teetal Income ;- $137,000 In term from of financial earning the income consultany or profession to profx 8- -> -> Consultancy firm :- 7126,000 Steup_professor :- $107.000 In Financial tecm, 12805- X should so into consulting. (Nate & actual monetary Income taken into Consideration Other wie Gelen pshy chic Income taken into consideration the teetal income from being professor will be $137,000 and she should stay Yat wriveritp.] 10>10) on the basis of above computerlion I advice prof. X to not become her awen boss because there will be more earning than beins o con sutant. taken into ( Note i Pshychic Income consideration )
note :- part c of 1c answered in last ....