Hiro owns and operates a small business that provides economic consulting servic
ID: 1226347 • Letter: H
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:
1. If Hiro only spent $50,000 on travel services he would be indifferent between the two careers.Explanation / Answer
Option 4.
The economic profits in this case are given by the difference between total revenue and total cost which includes implicit and explicit cost . Thus, explicit cost = $ 57,000. Implicit cost or opportunity cost = 100 + 50,000 = $50,100.
Thus, firm is earning 100,000 - 50,100 - 57,000 = - $7100 as economic profits. Thus, economic profits are negative,
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