Lee, a programmer, earned $45,000 in 2010 but in 2011 he opened a custom woodwor
ID: 1222876 • Letter: L
Question
Lee, a programmer, earned $45,000 in 2010 but in 2011 he opened a custom woodworking business. After one year, he submitted the data on the right to his accountant.
Lee, a programmer, earned $45,000 in 2010, but in 2011, he opened a custom woodworking business. After one year, he submitted the data on the right to his accountant Question Facts i He stopped renting out his cottage for $3,500 a year and used it as his woodworking shop. The market value of the cottage increased from $64,000 to $69,000 Lee's explicit costs are and implicit costs are O A. $68,800; $108,000 OB. $108,000; $68,800 O C. $54,000; $63,800 O D. $54,000; $68,800 OE. $63,800, $54,000 ii He spent $25,000 on materials, phone, utilities, ii He leased machines for $13,000 a year iv He paid $10,000 in wages V He used $15,000 from his savings account, which etc Lee's economic profit is pays 2 percent a year interest O A. $56,200 O B. $20,000 O C. $66,000 OD. $117,800 vi He borrowed $60,000 at 10 percent a year from the bank vii He sold $120,000 worth of furniture O E. $2,200 v Normal profit is $20,000 a yearExplanation / Answer
Implicit cost is the opportunity cost which Lee has to sacrifice to open woodworking business.
Implicit cost = Salary of Lee as a programmer + Rent of the cottage + Deposit of saving account + Interest on saving
Implicit cost = $ 45,000 + $ 3,500 + $ 15,000 + $ 300 (2% of $ 15,000) = $ 63,800
Explicit cost is the cost which is incurred to operate business like payment of rent, wages, etc.
Explicit cost = Expenditure on material, phone, utilities, etc + Amount paid on wages + Machine on lease + Interest on borrowings
Explicit cost = $ 25,000 + $ 10,000 + $ 13,000 + $ 6,000 (10% of $ 60,000) = $ 54,000
Answer is C. $ 54,000; $ 63,800
Economic Profit = Total revenue - (Implicit cost + Explicit cost) = $ 120,000 - ($ 63,800 + $ 54,000)
= $ 120,000 - $ 117,800 = $ 2,200
Answer is E. $ 2,200
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