Question

Hiro owns and operates a small business that provides economic consulting services. During the year he spends $57,000 on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn’t use the computer, he could sell it and earn yearly interest of $100 on the money created through this sale. Hiro’s total revenue for the year is $100,000. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of $50,000.
Which of the following statements is true:A. If Hiro only spent $50,000 on travel services he would be indifferent between the two careers.B. The salary Hiro earns from his job teaching economics is irrelevant information when calculating his economic profit.C. Since Hiro’s revenues from his consulting job are greater than his salary from his job as an economics teacher, he should continue providing consulting services.D. Since Hiro’s economic profit is negative, he would be better off if he didn’t operate the consulting business and taught economics instead.

Answer 1

Answer: D. Since Hiro’s economic profit is negative, he would be better off if he didn’t operate the consulting business and taught economics instead.

Explanation:

Economic Cost is calculated by taking into account all costs, both Implicit and Explicit. Implicit Costs are also known as Opportunity costs and are referred to as the income you could be earning if you were doing the alternative.

Hiro's Economic Cost can hence be calculated by,

Economic Cost = Implicit costs + Explicit Costs

                            = (50,000 + 100) + 57,000

                            = $107,000

Subtracting that from his Revenue per year gives,

= 100,000 - 107,000

= -$7,000

Hiro is experiencing an Economic Loss by operating his business and would be better off Teaching Economics at the small local college.