jane had $50000 in savings which, if properly invested, could earn her $4000 a y
ID: 1104122 • Letter: J
Question
jane had $50000 in savings which, if properly invested, could earn her $4000 a year in interest. Instead, Jane decided to use this money to buy a mini-bus and set up a commuter service between Topeka and Lawrence. In order to do this, she also had to quit her job where she earned $28000 a year. The price Jane charges for a trip on her bus is $12, and over a year 6000 people buy a ride. Sje does most of the driving herself, but she has also hired a part-time driver for $16000 a year. All other expenses such as fuel, maintenance, insurance, etc. altogether cost her $12000 a year. a.how large is Jane’s annoul revenue? b.what is her annoul profit? c.what is her annoul “economic profit”? d. was starting this business a good idea for Jane? explain briefly jane had $50000 in savings which, if properly invested, could earn her $4000 a year in interest. Instead, Jane decided to use this money to buy a mini-bus and set up a commuter service between Topeka and Lawrence. In order to do this, she also had to quit her job where she earned $28000 a year. The price Jane charges for a trip on her bus is $12, and over a year 6000 people buy a ride. Sje does most of the driving herself, but she has also hired a part-time driver for $16000 a year. All other expenses such as fuel, maintenance, insurance, etc. altogether cost her $12000 a year. a.how large is Jane’s annoul revenue? b.what is her annoul profit? c.what is her annoul “economic profit”? d. was starting this business a good idea for Jane? explain briefly a.how large is Jane’s annoul revenue? b.what is her annoul profit? c.what is her annoul “economic profit”? d. was starting this business a good idea for Jane? explain brieflyExplanation / Answer
(a)
Price charged per ride per person = $12
Rides purchased in a year = 6,000 rides
Calculate the total revenue -
Total revenue = Price charged * Rides purchased = $12 * 6,000 = $72,000
The Jane's total revenue is $72,000.
(b)
Jane pays part-time driver a salary of $16,000 per year. She also incurs miscellaneous expenses of $12,000 a year.
These two are explicit cost.
Annual profit is calculated by subtracting explicit costs from the total revenue.
Calculate the annual profit -
Annual profit = Total revenue - Explicit cost
Annual profit = Total revenue - Salary of part-time driver - Miscellaneous expenses
Annual profit = $72,000 - $16,000 - $12,000 = $44,000
Jane's annual profit is $44,000.
(c)
In order to calculate economic profit, we have to subtract the sum total of explicit cost and implicit cost from the total revenue.
Implicit cost includes interest foregone and salary foregone.
Calculate the economic profit -
Economic profit = Total revenue - Explicit cost - Implicit cost
Economic profit = Total revenue - Salary of part-time driver - Miscellaneous expenses - Interest foregone - salary foregone
Economic profit = $72,000 - $16,000 - $12,000 - $4,000 - $28,000 = $12,000
Jane's economic profit is $12,000.
(d)
Whether starting a business is a good idea or not depends on the quantum of economic profit being earned by the business.
If business is earning positive economic profit the starting a business is a good idea because this indicates long-run viability of the business otherwise not.
In given case, Jane is earning a positive economic profit.
So, starting the business was a good idea for Jane.
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