Answer to Question #238793 in Microeconomics for salim

Question

Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smart phones. Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit. With an annual overhead costs and operating expenses amounting to $145000. Jamie expects a profit of 20 percent. This margin is 5 percent larger than of her largest competitors, Apps. Inc.

a. If Jamie decides to embark on her new venture, what will her accounting cost be during the first year of operation? Her implicit costs? Her opportunity cost?

b. Suppose that Jamie’s estimated selling price is lower than originally projected during the first year. How much revenue would she need in order to earn positive accounting profits? positive economic profit?

Answer 1

a)

accounting cost during the first year of operation is given by;

$=Annual \space overhead\space costs\space and\space Operating\space expenses = \$ 145,000$

The implicit cost

$=\$75,000$

Both the implicit and explicit costs form the opportunity cost

Hence it is calculated as follows,

$\$145,000+\$75,000=\$220,000$

b)

$Accounting\space profits=Total \space revenue -Accounting\space costs.$

For Jamie to earn positive accounting profits, the total revenue per year should be greater than accounting costs of $\$145,000$

$Economic\space profits=Total\space revenue-Opportunity\space costs$

Hence to earn a positive economic profits, the Total reveue per year must be greater than $\$220,000$