Pat, a lawyer working for a large law firm and earning $62,000 per year, is cont
ID: 1192312 • Letter: P
Question
Pat, a lawyer working for a large law firm and earning $62,000 per year, is contemplating setting up her own law practice. She estimates that renting an office would cost $11,000 per year; hiring a legal secretary would cost $22,000 per year; renting the required office equipment would cost $13,000 per year; and purchasing the required supplies, and paying for electricity, telephone, and so forth would cost another $5000. The lawyer estimated that her total revenues for the year would be $105,000, and she is indifferent between keeping her present occupation with the large law firm and opening her own office.
a) How much would be the explicit costs of the lawyer for running her own law office for the year?
b) How much would the accounting costs be? The implicit costs? The economic costs?
c) Should the lawyer go ahead and start her own practice?
Explanation / Answer
The implicit cost of direct cost of factor of production and fixed cost of equippment of a business. In explicit cost is the opportunity cost of giving up the next best alternative in production. This is also called the economic cost of production.
The opportunity cost or explicit cost of giving up her present occupation is $65000.
The implicit cost of production is (11000+22000+13000+5000)=$51000
Total cost is (implicit +explicit cost)=$116000
Total revenue from the business if $104000
Here the economic profit is negative. (revenue -total cost) but the accounting profit is positive (revenue-implicit cost).
As she earns a negative economic profit in the business, her best alternative should be to continue the job and not start her own business.