ECO101H1 Lecture Notes - Lecture 7: Farmer Jack, Marginal Product, Marginal Cost

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7 Dec 2016

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ECO101H1 Full Course Notes

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We assume that the firm"s goal is to maximize profit. Explicit: require an outlay of money, e. g. wages. The cost of something is what you give up to get it, both explicit and implicit. Implicit: do not require a cash outlay, e. g. the cost of the owner"s time. Explicit cost = on interest loan. Case 2: use ,000 of your savings, borrow the other ,000. Explicit cost = interest on loan implicit cost = foregone interest you could have earned on your ,000. In both cases, exp + imp costs are . Econ: total revenue minus total costs (including explicit and implicit) Accounting profit ignores implicit, so it is higher. The e rent of ppffice space is increased by : you rent your office space ex costs increase by both a and e profit fall by , you own your office space. Explicit costs do not change, so ap does not change.

Related Questions

You have the opportunity to get a VEGGIE Cafe franchise (this specializes in BOCA Veggie Burgers and other heart-healthy fast foods). You now manage three Big Bird Stick-e-Chicken shops for another owner and feel you are ready to be your own boss. You estimate your VEGGIE will gross $250,000 in annual sales. VEGGIE annual franchise fees will cost $5,000 plus another 3% of your gross sales. Advertising expenses have two parts: local advertising (which will cost $7,000 a year) and your share of National advertising (which will be 2% of gross sales). A store location (formerly a Burger Hut) is available for $6,000 a year plus a yearend rent bonus of 2% of gross sales in excess of $40,000. You will have to borrow money from a bank at 9% per annum (which will cost you $13,500 a year in interest). Your life savings of $20,000 (now earning you 5% per annum in interest) will also have to be invested in the business. NOTE: neither the bank loan principal you borrow from the bank nor the $20,000 of your own money you invest is an explicit or implicit cost. However, the interest paid on the bank loan is explicit and the interest foregone on your savings is implicit. Other estimated annual expenses are: utilities $12,000; labor $50,000; food ingredients $60,000; maintenance $9,600; liability insurance $3,000. Stick-e-Chicken pays you $12,000 a year wages plus a yearend bonus of 1% of their gross sales (last year their sales totalled $700,000). Of course, you will give up Stick-e-Chicken's salary and bonus. You estimate you can earn $10,000 more than you now earn at Stick-e-Chicken to compensate you for the additional responsibility of your own business.

a. What is the estimated explicit (accounting) cost of your proposed business? Itemize in detail.

b. What is the accounting profit you project for your business?

c. What is the total implicit cost you estimate for your venture? Itemize in detail.

d. Do you project any economic profit? How much?

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Suppose you are considering starting your own consulting firm. You estimate if that if you did not start the firm, your starting salary at a job would be $40,000/yr. The revenues from this firm are expected to be $1,500,000. Some of the expenses you expect to encounter are $25,000 for an employee and operating costs (rent, supplies, utilities, etc.) of $500,000. To begin the business, you must borrow $100,000 from the bank and pay 8% interest on the loan, and also uses $50,000 of your own money that was in a savings account previously earning 2% interest. Equipment (computers, etc.) will cost $20,000.

a. Determine the pre-tax accounting profit of this firm.

b. Determine the pre-tax economic profit of this firm.

c. Which costs are explicit and which costs are implicit?