Question

15.

1. When Burton Cummings graduated with honors from Canadian Trucking Academy his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton's rig rent for $15,000 per month. If Burton were driving trucks for one of the competing trucking firms, he would earn $5,000 per month.

a. How much are Burton's explicit costs per month? How much are his implicit costs per month?

b. What is the dollar amount of opportunity cost of resources used by Burton Cummings each month?

c. Burton is proud of the fact that he is generating a net cash flow of $7000 ($25,000 - $18,000) per month since he would be earning only $5,000 per month, if he were working for a trucking firm. What advice would you give Burton Cummings?

Answer 1

Solution:-

The explicit costs per month amount to the $18,000 in operating costs. No other costs are listed.

The implicit costs would be the value of what he is not getting by going to work for the competing trucking firms: the $5,000 salary PLUS the $15,000 rent he could be getting if he rented out his own truck while driving a company truck. This would be a total of $20,000

This $20,000 would be his opportunity costs. But since the question specifically asks for the opportunity costs "of the resources used...each month", then I would say that would be $15,000, the amount of rent he could be getting on the use of his truck.

Based solely on an economic outcome (you have to ignore the fact that he may get a lot of satisfaction being independent), the advice would be to work for the competing firm and rent out his own truck. His opportunity cost of $20,000 is greater than his current cash flow of $7,000 by a total of $13,000 per month.

A breakdown:

Currently: Revenue $25,000, expenses $18,000 net $7,000

If he took this advice: Salary $5,000, rental income $15,000, expenses zero, net $20,000

The difference is $13,000 that he could gain by taking this advice.

HOWEVER: If he did put a value on the satisfaction that he gets by being independent, then his current situation would increase by that amount, and the opportunity cost of going to work for a competing firm would increase by that amount. Depending on how much that "value" equates to dollars, it could change the advice to give him.