Harvey quit his job at State University where he earned $45,000 a year. He figur

Question

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.

Refer to the above information. The implicit costs of Harvey's firm in the first year were:

$50,000

$60,000

$100,000

$150,000

Explanation / Answer

For the 1st year,

Implicit cost = University earnings foregone + Foregone entrepreneurial income + Bond interest foregone

= $45,000 + $5,000 + ($100,000 x 10%)

= $50,000 + $10,000

= $60,000

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