Question

Question No.3:                                                                                                                 {10marks}

Solve the following problems:

1. A person managing a dry-cleaning store for OMR 50,000 per year decides to open a dry-cleaning store. The revenues of the store during the first year of operation are OMR 150,000, and the expenses are OMR 40,000 for salaries, OMR 10,000 for supplies, OMR 13,000 for rent, OMR 2,000 for utilities, and OMR 5,000 for interest on the bank loan.

*Calculate:                                                                                                    

(a) The accounting profit, (1mark)

(b) The economic profit (1mark)

2. Mr. Ali owns and operates a small business that provides economic consulting services. During the year he spends OMR 60,000 on travel to clients and other expenses, and the computer that he owns depreciates by OMR 5,000. If he didn’t use the computer, he could sell it and earn yearly interest of OMR 100 on the money created through this sale. Mr. Ahmed’s total revenue for the year is OMR 110,000. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of OMR 60,000.

1. What is Ahmed’s accounting profit? (1marks)
2. What is Ahmed’s economic profit? (2marks)

3. You are trying to decide whether to go to India on vacation or stay at home and work. If you work, you will earn OMR 15 per hour for the 42-hour workweek. If you go away, you will incur the following costs.
   • Airline ticket                 OMR 700
   • Hotel                            OMR 850
   • Meals                           OMR 500
   • Incidentals                    OMR 200

1. What are the implicit costs of going on the trip?(1 mark)
2. What are the accounting costs of going on the trip? (1 mark)
3. What are the economic costs of going on the trip? (1 mark)

4. The costs of attending the school of economics for one year are OMR 4, 250 for tuition, OMR 1400 for Reference books, OMR 950 for the Hostel room, and OMR 1200 for meals. As another opportunity, the student could earn OMR15, 000 by getting a job instead of going to university and, also, earn 5% interest by saving the money not spent on attending university.

*Calculate                                                                                                          

                 (a) Economic costs (2 marks)

Answer 1

Answer 1

Explicit Costs = Saries + Supplies + Rent + Utilities + Interest

= 40000 + 10000 + 13000 + 2000 + 5000 = 70000 OMR

Implicit Costs = Salary Foregone

= 50000

Accounting Profit = Total Revenue - Explicit Costs

= 150000 - 70000 = 80000 OMR

Economic Profit = Total Revenue - Explicit Costs - Implicit Costs

= 150000 - 70000 - 50000 = 30000 OMR

Answer 2

Explicit Costs

= Travel Expenses + Depriciation

= 60000 + 5000 = 65000 OMR

Implicit Costs

= Salary + Interest on sale of Computer

= 60000 + 100 = 60100 OMR

Accounting Profit = 110000 - 65000 = 45000 OMR

Economic Profit = 110000 - 65000 - 60100

= - 15100 OMR

Economic Loss of -15100 OMR

Answer 3

Implicit Cost

= Cost of earnings through work

= 15 * 42 = 630 OMR

Accounting Cost

= Cost of Airline Ticket + Cost of Hotel + Cost of meals + Cost of Incidentals

= 700 + 850 + 500 + 200 = $2250

Economic Costs

= Accounting Costs + Implicit Costs

= 630 + 2250 = 2880 OMR.

Answer 4

Explicit Costs

= Tution Fees + Reference Books + Hotel charges + Meals

= 4250 + 1400 + 950 + 1200

= 7800 OMR

Implicit Costs

= Salary from Job + Interest on Savings

= 15000 + 5% of 7800

= 15000 + 390

= 15390 OMR

Economic Costs = 7800 + 15390 = 23190 OMR