(ples help with this problem with explanation thanks ) 2. Malcolm runs a bakery

Question

(ples help with this problem with explanation thanks )

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) Calculate Malcolm's explicit cost -

Explicit Costs = Wages of workers + Rent + Cost for supplies and raw material

                     = (10*50*400) + $50,000 + $125,000

                     = $375,000

Malcolm's explicit costs are $375,000.

(b) Implicit costs are costs of owner occupied resources. Malcolm is supplying his own labor to his bakery. if he utilize his labor at any other workplace then he can get $75,000 per ear. So, this cost of his labor is his implicit cost.

Malcolm could sell his business for $100,000 and could earn 5% as interest on it by depositing the amount in his bank. So, the interest foregone ($100,000 * 0.05) $5,000 is the implicit cost of Malcolm.

So,

Implicit cost = $75,000 + $5,000 = $80,000

Malcolm's implicit costs are $80,000.

(c) Currently, Malcolm is working at his bakery. The next best alternative for Malcolm is to sell his bakery and work some where else.

If he does so, he can get $100,000 by selling his bakery and $75,000 a year as salary by working some where else.

Thus, the next best alternative offers him a reward of $175,000.

Opportunity cost is the cost of next best alternative foregone.

So, the Malcolm's opportunity cost is $175,000.

(d) At present, Malcolm is devoting his time and energy at his own bakery but a baker in another town is ready to offer him $75,000 a year if he is ready to work for him that is devote his time and energy at his bakery.

So, the implicit cost of Malcolm's time and energy is $75,000.

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