1. Alex quit his job at State University where he earned $45,000 a year. He figu
ID: 1248098 • Letter: 1
Question
1. Alex quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
a. Refer to the above information. The explicit costs of the firm in the first year were:
1. 655,000
2. 150,000
3. 825,000
4. 605,000
b. Refer to the above information. The total economic costs (explicit and implicit, including a normal profit) in the first year were:
1. 665,000
2. 825,000
3. 60,000
4. 150,000
Explanation / Answer
1. A - the short run supply curve is the portion of the marginal cost curve that lies above the minimum of the average variable cost curve.
2. Total variable costs - TVC = (AVC)Q. In this case, at Q, the variable cost is B. Therefor TVC = B * Q. B is the height of the aforementioned rectangle and Q is the base.
3. Total fixed costs. - ATC = AFC + AFC. Therefore, that height from E to D is the height of your average fixed cost rectangle. Multiply that by the base Q to get the total fixed cost.
a. 100,000 + 5,000 + (55*11,000) = $655,000
b. 655,000 + 45,000 = something greater than 665,000 so the answer must be $825,000
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