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1 4 4 C H A P T E R 10
Answers to Additional Problems and Applications
Use the following data to work Problems 8 and 9.
Lee is a computer programmer who earned $35,000 in 2016. But on January 1, 2017, Lee opened
a body board manufacturing business. At the end of the first year of operation, he submitted the
following information to his accountant:
• He stopped renting out his cottage for $3,500 a year and used it as his factory. The market
value of the cottage increased from $70,000 to $71,000.
• He spent $50,000 on materials, phone, etc.
• He leased machines for $10,000 a year.
• He paid $15,000 in wages.
• He used $10,000 from his savings account, which earns 5 percent a year interest.
• He borrowed $40,000 at 10 percent a year.
• He sold $160,000 worth of body boards.
• Normal profit is $25,000 a year.
8. Calculate Lee’s opportunity cost of production and his economic profit.
Lee has costs of $50,000 paid for materials, phone, utilities, etc; $15,000 for wages; $10,000 paid
for the machine lease; $4,000 paid for interest expense on the loan; $3,500 of forgone rent for
the cottage plus −$1,000 for the “depreciation” of the cottage (the cottage actually appreciated);
$500 in forgone interest from the savings account; wages forgone of $35,000; and, $25,000 for
normal profit. These give a total opportunity cost of $142,000. Lee’s economic profit is the total
revenue, $160,000, minus the total opportunity cost, $142,000, for an economic profit of
$18,000.
9. Lee’s accountant recorded the depreciation on his cottage during 2017 as $7,000.
According to the accountant, what profit did Lee make?
Lee’s accountant will include costs of $50,000 paid for materials, phone, utilities, etc; $15,000 for
wages; $10,000 paid for the machine lease; $4,000 paid for interest expense on the loan; and,
$7,000 of depreciation expense for a total opportunity cost of $86,000. The total profit according
to the accountant will equal total revenue, $160,000, minus total cost, $86,000, for a profit of
$74,000.
10. In 2016, Toni taught music and earned $20,000. She also earned $4,000 by renting out her
basement. On January 1, 2017, she quit teaching, stopped renting out her basement, and
began to use it as the office for her new Web site design business. She took $2,000 from her
savings account to buy a computer. During 2017, she paid $1,500 for the lease of a Web
server and $1,750 for high-speed Internet service. She received a total revenue from Web
site designing of $45,000 and earned interest at 5 percent a year on her savings account
balance. Normal profit is $55,000 a year. At the end of 2017, Toni could have sold her
computer for $500. Calculate Toni’s opportunity cost of production and her economic profit
in 2017.
Toni has costs of $1,500 for the lease of a Web server; $1,750 for high-speed Internet service;
$55,000 for normal profit; $20,000 of forgone earnings from teaching; $4,000 of forgone rent
from renting her basement; $100 of forgone interest from her saving account; and $1,500 for the
depreciation of her computer (which equals the $2,000 paid for it minus the $500 for which she
could have sold it). These various costs sum to a total opportunity cost of $83,850. Toni’s
economic profit is her total revenue, $45,000, minus her total opportunity cost, $83,850, for an
economic loss of $38,850.