Problem1
An accounting professor is considering opening his own consulting firm. To do so, she will have to quit her current job, that pays $125,000 a year, and take over a building that she owns and currently rents to her friend for $15,000 a year. Additionally, she will have to withdraw $50,000 from her savings, that pays 3.5 percent per year. Her expenses at the firm have been estimated as follows: $85,000 for employee salaries, $6,000 for insurance, $8,000 for utilities, and $9,250 for supplies. She anticipates annual revenues of $250,000.
1. Determine:
a.The annual explicit costs
b.The annual implicit costs
c.The total annual opportunity costs
d.The annual accounting profits
e.The annual economic profits
2. Based on your answers to question 1, do you think the decision to open the consulting firm is a good decision? Explain your answer!
Problem2
Assume that youown a building in downtown Laredo that you want to lease for $100,000 per year for five years. The explicit cost of maintaining the building is $20,000, and the implicit cost is $30,000. All revenues are received, and costs borne, at the end of each year. Suppose the interest rate is 4.5 percent.
1. Enunciate theFormula for the Present Value of a Stream. [from your textbook]
2. Determine the present value of the stream of your accounting profits.
3. Determine the present value of the stream of your economic profits.
Problem3[Watch the demonstration problem 1.3, page 20 from the textbook]
An engineering firm recently conducted a study to determine its benefit and cost structure (total cost). The results of the study are as follows:
The total benefit from producingunits isso that its marginal benefit isand the total cost of producingunits isso that its marginal cost is
1. Enunciate theMarginal Principle.[from your textbook]
2. Find the level of outputthat maximizes the net benefit.
3. Find the maximum net benefitachieved by the firm at the output level.
4. If you were the manager of the firm, would you recommend the production of q=205 units of output instead of the production ofdetermined in question 2.? Explain your answer!