Question

Barney decides to quit his job as a corporate accountant, which pays $10,000 a month, and goes into business for himself as a certified public accountant. He decides not to rent office space downtown, but instead sets up shop in his converted garage apartment, which he could rent out for $300 a month if he wasnât using it as his own office. He must purchase office supplies worth $75 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $12,000 per month. a. What are Barneyâs monthly explicit costs? b. What are Barneyâs monthly implicit costs? c. What are Barneyâs monthly economic costs?

Answer 1

a. $125

b. $10,300

c. $10,425

Step-by-step explanation:

a. The explicit costs are the actual costs incurred by Barney from starting the new operation. In this case, the explicit costs are the amount spent on office supplies and the raise on the electricity bill:

`IC = \$50+\$75=\$125`

b. The implicit costs are the opportunity costs incurred by Barney. That is, the revenue he could potentially earn by choosing another option. In this case, the implicit costs are his previous salary and the rent value of his garage apartment:

`EC = \$10,000+\$300\\EC=\$10,300`

c. The economic costs are the sum of the implicit and explicit costs:

`C=IC+EC\\C=\$10,300+\$125 = \$10,425`