1. Suppose that Tonya plans to open a new restaurant. She is required to pay a n

Question

1.      Suppose that Tonya plans to open a new restaurant. She is required to pay a non-refundable ABC deposit to sell alcohol, which costs her $5,000. She needs to buy tables and chairs, costing $1,000; a refridgerator, costing $2,000; and hire staff, costing $1,500. If Tonya had decided to not open the restaurant, she would have stayed at her job as an accountant, earning $100,000.

a.       What are Tonya’s economic costs?

b.      What are Tonya’s accounting costs?

c.       What is Tonya’s opportunity cost?

d.      Using the economic costs found in part a., suppose Tonya earns revenues, during the first year of the restaurant, of $105,000. Will she continue to operate? What if she were to earn $102,000. Will she continue to operate?

Explanation / Answer

a) Economic costs include both explicit and implicit costs .

So here economic costs = accounting cost ( explicit )+opportunity costs (implicit) = ( 1000+ 2000+1500) + (100000) = 1,04,500 $ .

b) Accounting cost = explicit cost = ( 1000+ 2000+1500) = 4,500 $

c) Opportunity cost = amount forgone to do the business = 1,00,000 $ ( salary ) .

d) Since , ABC deposit is non-refundable it is not considered . Hence it is a sunk cost .

If she earns 1,05,000 $ , it is more than the economic cost incurred so she operates . But 1,02,000$ is less than economic costs , she incurs loss . Hence she stops operating .

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