Question

Suppose Bob has been offered two jobs- an indsutry job and a teaching job. Hes considering taking the industry job. The teaching job has a salary of $60,000. in addition to the salary, Tobias values the flexibility of the teaching job at $20,000 a year. The industry job requires relocating, and the moving costs are $5,000. The industry job requires buying more fancy clothes and those costs will be $500. The industry job pays $100,000

i. What is the explicit cost for the year?

ii. what is the implicit cost for the year?

iii. what is the accounting profit?

iv. what is the economic profit?

v. How much profit is needed to recieve a normal profit (i.e., zero economic profit)?

vi. what salary for the industry job is needed for bob to recieve a normal profit?

Answer 1

a.

Explicit costs are those costs which are actually incurred/paid in cash i.e., out-of-pocket expenses.

List of explicit costs:

Relocating costs = $5,000

Cost of clothes = $500

Explicit costs = $5,000 + $500 = $5,500

b. Implict costs are the opportunity costs of the factors of production involved.

List of implicit costs:

Implict costs = Total benefits from teaching job = Salary at teaching job + Value of flexibility of teaching job = $60,000 + $20,000 = $80,000

c. Salary at industry job = $100,000

Explict costs = $5,500

Accounting profit = Salary - Explicit costs = $100,000 - $5,500 = $94,500

d. Economic profit = Salary - (Implicit costs + Explicit costs) = $100,000 - ($80,000 + $5,500) = $100,000 - $85,500 = $14,500

e. Economic profit = Accounting profit - Implicit costs

When the economic profit is zero, accounting profit = implicit costs

=> Accounting profit = $80,000

f. Normal profit condition is the same as zero economic profit condition.

We know that,

Economic profit = Salary - (Implicit costs + Explicit costs)

=> Salary = Implicit costs + Explicit costs

=> Salary = $80,000 + $5,500

=> Salary = $85,500