Question

Managers, Profits, and Markets   

1. For each one of the costs below, explain whether the resource cost is explicit or implicit, and give the annual opportunity cost for each one. Assume the owner of the business can invest money and earn 4.5 percent annually.

a. The company’s delivery truck, which cost $150,000 four years ago, is now worth $120,000. The company has paid off its bank loan used to purchase the truck and now owns the delivery truck.

b. The janitorial service that keeps the company’s building clean and sanitary charges the company $2,000 per month, on a month-by-month plan (i.e., no contract is involved). Payment is made at the end of each month, after the janitorial services have been performed.

c. The company uses a custom-made software program to manage its inventory. The company paid a consulting firm $32,000 to develop the custom software.

d. A Ricoh color printer and scanner is rented for $3,000 per year. The rental price does not include the cost of consumables such as toner cartridges and paper.

e. Office secretarial services cost $38 per hour, which includes the cost of providing benefits (health and dental insurance). The company uses 650 hours of secretarial services annually.

2. During a year of operation, a firm collects $1,200,000 in revenue and spends $865,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $250,000 of their own money to the firm instead of investing the money and earning a 9.5 percent annual rate of return.

a. The explicit costs of the firm are $________. The implicit costs are $________. Total economic cost is $________.

b. The firm earns economic profit of $________.

c. The firm’s accounting profit is $________.

d. If the owners could earn 15 percent annually on the money they have invested in the firm, the economic profit of the firm would be ________.

3. Over the next three years, a firm is expected to earn economic profits of $60,000 in the first year, $50,000 in the second year, and $20,000 in the third year. After the end of the third year, the firm will go out of business.

a. If the risk-adjusted discount rate is 6 percent for each of the next three years, the value of the firm is $________. The firm can be sold today for a price of $________.

b. If the risk-adjusted discount rate is 11 percent for each of the next three years, the value of the firm is $________. The firm can be sold today for a price of $________.

Answer 1