Answer to Question #187716 in Microeconomics for Mitchell

Question

Joe is self-employed in a store that has a rental value of R500 a month which he pays, but he can vacate the building without giving notice. His other expenses are R100 a month for maintenance. He makes R25 000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make R20 000 a year. No one else can be hired to work in the store.

Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store. What should Joe do?

Answer 1

If Joe works elsewhere at a job , he would earn 20,000 per year Since he is under long term contract, he should still pay the amount of lease Joe's net earning will be = 20000 – 6000                                       =14000Joe’s net earning gets reduced by (17800 – 14000) =3800 per yearHence in financial terms Joe shall not take new job ,since he will make less money compared to what he is earning now.