Question

Case 2 Jim resigns from his job, from which he was earning $40,000 per year, and then uses his own savings as the only source of capital to start a new firm. In the first year, his revenue is $120,000 and the total explicit cost is $60,000. Jim does not want to reveal how much own-savings he uses in his business, but implies that if the interest rate was higher than 5%, he would prefer not to start his own business. 8. Refer to Case 2. The savings Jim uses to start his business is $_ 400,000 300,000 500,000 1,200,000

I took 120,000-60,000 = 60,000 Acct Profit

40,000 + .05X = 60,000 where X = Savings

Solved for X, I got 400,000

Is this right? If not, please show me how to do it correctly

Answer 1

Explicit cost = 60000

Accounting profit = 120000 - 60000 = 60000

Let saving be X

implicit cost = Forgone salary + interest on saving

= 40000 + 0.05 * X

As per condition given in question

40000 + 0.05X = 60000

0.05 X = 60000 - 40000 = 20000

X = 20000 / 0.05 = 400000

Your answer is correct