Answer:
Giles and His Business
1. Revenue generated by the business = $250,000
2. The interest on the bank loan = $200
3. Explicit costs are:
Cost of Trinkets $20,000
Cost of goods 170,000
Electricity expense 5,000
Interest on loan 200
Loss on sale of
memorabilia 1,000
Depreciation 10,000
Total $206,200
4. Accounting profit = $43,800
5. Yes. The loss arising from the sale of the memorabilia and the storefront lost value over time are costs of doing business, because they would not have been incurred if the business was not formed.
6. Gile's implicit costs are:
Loss of income as a librarian $50,000
Opportunity cost of renting out the storefront $20,000
Total implicit costs = $70,000
7. Gile's economic profit = ($26,200)
8. In determining whether or not Giles was right to start his small business, the economic profit matters more than the accounting profit.
9. His calculated economic profit should influence him in the short-run. However, profit prospects should influence his decision in the long-run.
10. This fire would affect both his economic and accounting profits.
Explanation:
a) Data and Calculations:
School Librarian income = $50,000 per year
Profit from an assortment of trinkets = $40,000 ($60,000 -$20,000)
Profit from purchase of goods = $20,000 ($190,000 - $170,000)
Electricity expense = $5,000
Shop fittings = $2,000
Bank loan = $2,000
Interest on loan = $200 ($2,000 * 10%)
Sale of memorabilia = $1,000
Opportunity cost (Renting) = $20,000
Depreciation on Storefront = $10,000 ($500,000 - $490,000)
Revenue generated by Gile's business:
Trinket = $60,000
Goods = $190,000
Total = $250,000
Explicit cost 206,200
Profit = $43,800
