Answer to Question #99622 in Microeconomics for Abbas Ali Khan

Question

Professor Martin is considering leaving the university and opening a consulting business. For her services as a consultant she would be paid$150000 a year. To open this business, Professor Martin must use a house from which she collects rent of $10000 per year as an office and hire a secretary at a salary of $ 30000 per year. Also, she must withdraw $40000 from savings for miscellaneous expenses and forego earning 5 percent interest per year on these savings. The university pays Professor Martin $ 110,000 a year. Based only on economic decision-making, do you predict the professor will leave the university to start a new business?

Answer 1

Professor Martin would rather stay in the university because it is more economical than opening a consulting business. In the university she will be able to save unlike in the consulting business where he will incur extra expenses like paying the office rent, hiring a secretary and other miscellaneous expenses which will make her forego earning 5 percent interest per year by saving.