Final answer:
Implicit costs are vital for assessing profitability. Eryn's profit is $115,000 excluding these costs. The consultant should buy vegetables to maximize her earnings.
Step-by-step explanation:
The concept of calculating implicit costs is an important part of understanding the profitability of a business venture. Taking the example provided, Eryn is considering opening her own legal practice. She estimates an annual income of $200,000. To determine her profitability, she must consider both explicit costs like the office rent of $50,000 per year and the law clerk's salary of $35,000 per year, and also any implicit costs which include opportunity costs.
For Eryn's legal practice to be profitable, her total revenue needs to exceed her total costs. Based on the given scenario, Eryn would face $85,000 in explicit costs ($50,000 for office rent plus $35,000 for a law clerk). If her estimated income is $200,000 per year, she would achieve a profit of $115,000 before considering implicit costs. Implicit costs include the salary she is forgoing at the corporate law firm. If we assume her corporate job pays less than this amount, then her practice would indeed be profitable. But if her current salary is more, she must consider whether the difference is worth the autonomy and potential long-term growth of her own practice.
Similarly, when it comes to the consultant who earns $200 per hour, the economic rationale behind her decision to purchase vegetables instead of growing them is rooted in opportunity cost. The consultant can earn significantly more by working an extra hour at her job than she would save by growing her vegetables, especially if she isn't skilled at gardening.
Therefore, it makes more economic sense for her to maximize her time working in her area of expertise and buying the vegetables, illustrating effective allocation of her time and resources.