Answer to question 1

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Week 5 Tutorial Questions
Week 5 Tutorial Questions


Short-answer Questions

Answer to question 1)

Explicit cost: buying equipment, rent wages and food

Rent + Staff wages + Food = $65k

Implicit cost:

  • Full-time salary = $50k

  • Interest income form saving = $1k

  • Implicit cost = $51k

Sarah’s accounting profit = $100k - $65k = $35k.

  • Sarah will earn $35k during the first year.

Sarah’s economic profit = $100k - $65k - $51k = -$16k

  • Result in an economic loss

  • Opening a restaurant is not the best option for Sarah because she will incur an economic loss of $16k if she runs her restaurant.

$30k of equipment is not a cost. The reason is that she doesn’t have to throw them away when she finishes using them. In fact, she could re-sell them for a small amount of money but unfortunately, it would be the same as the price when she bought them. Which would result in a small loss which is called ‘depreciation’ in accounting.

  • $30k is the loss from value of Sarah’s non-current assets.

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