ples help with project 2. Malcolm runs a bakery that employs 10 workers who each
ID: 1209719 • Letter: P
Question
ples help with project
2. Malcolm runs a bakery that employs 10 workers who each work 50 weeks a year and earn $400 a week.
In addition, Malcolm has rent of $50,000 per year, and costs for supplies and raw materials totaling
$125,000 a year. Malcolm occasionally is approached by another baker in town who is willing to pay
Malcolm $75,000 a year to come work for her. Malcolm could sell his business for $100,000. The current
interest rate on deposits at Malcolm's bank is 5%. Malcolm's revenue from the bakery is $440,000 a year.
a. What are Malcolm's explicit costs?
b. What are Malcolm's implicit costs?
c. What is Malcolm's opportunity cost?
d. What is the implicit cost of Malcolm's time and energy?
e. What is the implicit cost of capital?
f. What are Malcolm's accounting profits?
g. What are Malcolm's economic profits?
h. Should Malcolm continue to operate the bakery given the above cost and revenue figures? Explain your
answer.
i. Given the information, what is the minimum amount of revenue Malcolm's bakery must earn for
Malcolm to stay in business?
Explanation / Answer
(a) Explicit costs = Wage + Rent + Cost of supplies
= 10 x 50 x $400 + $50,000 + $125,000 = $(200,000 + 50,000 + 125,000) = $375,000
(b) & (c): Implicit cost is also known as opportunity cost, which is equal to Salary foregone & Sale value of current business:
$(75,000 + 100,000) = $175,000
(d) Implicit cost of time & energy = Salary foregone = $75,000
(e) Implicit cost of capital = Interest rate foregone = 5%
(f) Accounting profit = Revenue - Explicit costs = $(440,000 - 375,000) = $65,000
(g) Economic profit = Accounting profit - Implicit costs = $(65,000 - 175,000) = - $110,000 (Loss)
(h) Based on pure accounting profit, Malcolm will want to continue, but based on economic profit he will want to quit since there is a high economic loss.
Note: First 8 sub-questions are answered.
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