Phil the Pharmacist currently is working for the Gregory Pharmacy Company earnin
ID: 1199183 • Letter: P
Question
Phil the Pharmacist currently is working for the Gregory Pharmacy Company earning $40,000 in salary per year. He works 6 days per week and travels one hour in each direction to and from work each day. Phil values his own time at $9.00 per hour. Phil only works 50 weeks out of the year, for he always takes his two weeks paid vacation. He receives two simultaneous offers one day. Offer number one is to take a new job at a different pharmacy for a $60,000 salary. His commute would decrease to one-half hour in each direction, but he would still be working 6 days per week. His second offer is to open/buy a pharmacy of his own. That pharmacy would generate revenue of $200,000 for the first year. If Phil decides to buy his own pharmacy, it will cost him $100,000 to purchase, and he will have to take out an $80,000 loan from the bank at a 10% interest rate. The bank, for the first year, wants one payment of interest only at the end of the year (i.e., they are charging Phil simple interest for the first year). He will also have to use $20,000 of his own savings for the remainder of the funds. Currently his savings is earning 6% interest. If he buys the pharmacy, his commute will be 1.5 hours in each direction 6 days per week, and he will have to pay rent of 7,000 per year, buy supplies costing him 42,000 per year, hire an assistant at $35,000 per year, and pay for utilities that amount to 25,000 per year. You need to give Phil some advice. You should probably also review the concepts of explicit and implicit costs, opportunity cost, and economic profit before you give him any advice.
a. If he leaves his current job and takes job offer number one, how much more economic income will Phil be earning? Explain and justify your answer in detail. (2.5)
b. For the first year only, if Phil decides to open up his own pharmacy, how much economic income (or economic profit) will his pharmacy earn? What are the revenue and costs that Phil needs to consider in order to make a properly informed decision. Explain and justify your answer in detail. (15)
c. What should Phil do? Keep his current job? Switch to the new job? Or buy and open the pharmacy? (2.5)
Explanation / Answer
(a) In his current Job,
Earning of Phil per year = $40,000
Phil works for 6 days a week and 50 weeks in a year.
So, Phil works for total (6*50) 300 days in a year.
Each day Phil commutes one hour in direction to and from work. So, everday Phil uses 2 hours of his own time on travel.
This way, in a year, Phil uses (300 days * 2 hours) 600 hours of his own time on travel.
He value his own time at $9 per hour. So, for each hour of travel, it costs $9 to Phil as per his own estimate.
So,
Cost of travel in a year = 600 hours * $9 per hour
= $5,400
Calculate Economic Income of Phil in current Job -
Economic Income = Total earnings - Cost of travel
= $40,000 - $5,400
= $34,600
Thus, economic income of Phil in current job is $34,600.
If Phil takes up job offer 1,
Earning in job offer 1 = $60,000
In this job also, Phil works for 6 days a week and 50 weeks in a year.
So, Phil works for total (6*50) 300 days in a year in Job offer 1 as well.
In this job, each day Phil commutes one-half hour in direction to and from work. So, everday Phil will use 1 hour of his own time on travel.
This way, in a year, Phil uses (300 days * 1 hour) 300 hours of his own time on travel.
He value his own time at $9 per hour. So, for each hour of travel, it costs $9 to Phil as per his own estimate.
So,
Cost of travel in a year = 300 hours * $9 per hour
= $2,700
Calculate Economic Income of Phil in Job offer 1 -
Economic Income = Total earnings - Cost of travel
= $60,000 - $2,700
= $57,300
Thus, economic income of Phil in job offer 1 is $57,300.
If Phil leaves his current job and takes job offer number one then extra economic income he will earn will be as follow -
Extra economic Income = Economic income in job offer 1 - Economic income in current job
= $57,300 - $34,600
= $22,700
So, Phil will be earning extra economic income of $22,700, if he swithch the job.
(b) It has been provided that if Phil decides to buy his own Pharmacy then revenue for the first year will be $200,000.
This revenue is substantial given the income of Phil in current job.
However, Phil have to look at cost associated with buying a Pharmacy.
Cost of buying pharmacy is $100,000.
in order to buy pharmacy and pay $100,000, Phil has to take loan of $80,000 from bank at interest rate of 10% per annum.
Amount of interest to be paid to bank each year = $80,000 * 0.10 = $8,000
In addition, Phil have to pay $7,000 per year as rent, have to buy supplies of $42,000 every year, hire an assistant for $35,000 per year and pay for utilities $25,000 per year.
These are explicit cost per year of Phil if he decides to buy pharmacy as these payments will be made by phil to outsiders for running the business.
However, Phil also have to invest $20,000 of his own in business as well.
This money at present is earning 6% interest.
So,
Foregone interest = $20,000 * 0.06 = $1,200
Thus, Phil have to forego interest of $1,200 every year if he buys pharmacy.
In his own pharmacy as well, Phil works for 6 days a week and 50 weeks in a year.
So, Phil works for total (6*50) 300 days in a year in his own pharmacy as well.
Each day Phil commutes 1.5 hours in direction to and from work. So, everday Phil will use 3 hour of his own time on travel.
This way, in a year, Phil uses (300 days * 3 hour) 900 hours of his own time on travel.
He value his own time at $9 per hour. So, for each hour of travel, it costs $9 to Phil as per his own estimate.
So,
Cost of travel in a year = 900 hours * $9 per hour
= $8,100
Apart from this, Phil also have to forego $40,000 that he is earning as salary in his present job.
These three (foregone interest, cost of travel and salary forgone) are implicit costs as they are incurred by Phil on resources that he himself supplied.
Calculate Total explicit cost of Phil for one year of opening the pahrmacy -
Total explicit cost = Interest paid to bank + Rent + Supplies purchased + salary of assitant + Payment for utilites
= $8,000 + $7,000 + $42,000 + $35,000 + $25,000
= $117,000
Calculate Total implicit cost of Phil for one year of opening the pahrmacy -
Total implicit cost = Foregone interest + Cost of travel + salsy foregone
= $1,200 + $8,100 + $40,000
= $49,300
Calculate Total cost of Phil for one year of opening the pahrmacy -
Total Cost = Total explicit cost + Total implicit cost = $117,000 + $49,300 = $166,300
Calculate Economic earning of Phil for one year of opening the pahrmacy -
Economic earning = Total revenue - Total Cost = $200,000 - $166,300 = $33,700
Thus, for the first year only, if Phil decides to open up his own pharmacy,economic income (or economic profit) his pharmacy will earn is $33,700.
(c) In his current job, economic income of phil is $34,600.
If Phil takes up job offer 1, his economic income will be $57,300.
If Phil open his own pharmacy then his economic income for the first year will be $33,700.
As economic income of Phil is highest in job offer 1, Phil should swithch to the new job.