a) Using accounting costs, your friend says that he is earning an accounting pro

Question

a) Using accounting costs, your friend says that he is earning an accounting profit of $12,000 per year and he works full time for his company as a manager. Your friend has a college degree in finance. He thinks he is doing well, but what might you suggest concerning economic costs (hint: consider opportunity costs)?



b) Your friend finds the marginal cost of hiring an additional worker is $12 per hour. He finds that this worker can produce 2 t-shirts per hour with marginal revenue of $5 per shirt. Other things constant, should he hire this worker? Why or why not?

Explanation / Answer

a) If you consider opportunity costs (which you do when computing economic costs), given that your friend has a college degree in finance, he could presumably make considerably more than $12,000 a year if he found a different job. So his opportunity cost of his current job is greater than his profits and he would be considered to be making an economic loss. b) The worker adds a marginal benefit of $10 ($5 per shirt times 2 shirts) for each hour he works. Since you would be paying him $12 per hour, each hour you would be incurring a $10-$12= $2 loss and it doesn't make sense to hire him.

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