Question

Michael started a business that makes and sells custom made sweaters for dogs. When he opened up his shop, he paid a one-time licensing fee of $2,500. His only cash costs are the $1,000 he spends per month on rent (including utilities) and $2,500 he spends per month on the materials that he needs to make the sweaters. His total revenue in his first month was $4,500. His sister Carly advises him that he is losing money and should shut down. a. (3 points) As an economics guru, what would you advise him to do? b. (3 points) Are there any other costs that he should take into account? Explain.

Answer 1

Answer: He should Focus on Implicit cost

Explanation: Implicit cost is the cost of self-owned resources.

Example: 1.Owned capital invested by Michael initially to start the business. ( Same funds can be invested or saved in the bank that gives a rate of interest)

2. Michael's own opportunity cost ( If he wasn't working for his business as an entrepreneur, he would be working or take a job, which gives him per month salary).

Advice: Therefore he should consider these two opportunity costs ( Implicit cost ) to calculate his effective profit.