Question

Barney decides to quit his job as a corporate accountant (which pays $10,000 a month) and go 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 wasn’t 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 Barney’s monthly explicit costs? b. What are Barney’s monthly implicit costs? c. What are Barney’s monthly economic costs?

Answer 1

Answer:

a. $125

b. $10,300

c. $10,425

Explanation:

a. The computation of the explicit cost is shown below:

Explicit cost = Purchase of office supplies + Monthly electricity bill

                    = $75 + $50

                    = $125

b. The computation of the implicit cost is shown below:

Implicit cost = Lost of salary + rent out amount lost

                    = $10,000 + $300

                    = $10,300

c. The computation of the cost is shown below:

Economic cost = Explicit cost + Implicit cost

                         = $125 + $10,300

                         = $10,425