Question

In: Economics

You are currently working as a Senior Economist for the Congressional Budget Office in Washington DC...

You are currently working as a Senior Economist for the Congressional Budget Office in Washington DC making $108,000 per year.

Your lifelong ambition, however, has been to open your own cupcake store. You decide to quit your job as an economist to open your dream store near the River Walk in San Antonio.

You estimate that you will be able to sell 10,000 cupcakes per month at a price of $3.40 per cupcake.

You will have to pay monthly rent of $5,000 for renting the retail space and will have other cash costs of $2,500 per month (utilities etc.). The ingredients will cost you $2.00 per cupcake.

  1. 3 points) Calculate your monthly revenue.

  1. (3 points) Calculate total implicit costs (monthly)

(3 points) Calculate total explicit costs (monthly)

Solutions

Expert Solution

a. The number of cupcakes planned to be sold is 10,000 per month and the price of each cupcake would be $3.40 per cupcake. Therefore, the estimated monthly revenue would be=($3.40*10,000 cupcakes)=$34,000

a. The individual here quits his previous job of Senior Economist for the congregressional budget which used to pay him or her $108,000 per year to open up his or her own cupcake store in San Antonio. Hence, he or she is giving up or sacrificing=$108,000/12=$9000 per month to open up his or her own store and earn monthly revenue. Thus, the monthly implicit cost of the individual is $9000 in this instance.

The monthly rent for the individual would be $5000 and the utility expenses would be $2500 per month. The ingredient cost is $2 per cupcake and the total estimated production of cupcakes in a month is 10,000. Therefore, the total monthly ingredient cost per month=($2*10,000 cupcakes)=$20,000. Hence, the total explicit cost in a month=($20,000+$2500+$5000)=$27,500

Rahul Sunny answered 2 years ago
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