Charles has decided to open a lawn-mowing company. To do so, he purchases mowing
ID: 1205492 • Letter: C
Question
Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $3,000, buys gasoline ($1.90 in gas is required to mow each yard), and pays a helper $25,00 per yard. Prior to opening the lawn company, Charles earned $5,000 per year as a lifeguard at the neighbourhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 3% per year in the bank and that the mowing equipment depreciates (loses value) at 20% per year. Charles plans to mow 400 yards per year What are Charles' explicit costs of production? State the per lawn costs and total explicit cost for the year. What are Charle's implicit costs of production? State the per lawn costs and total implicit cost for the year. Suppose he charges $30 per lawn. Calculate Charles' accounting profit and his economic profit. Show your work! How much does Charles need to charge in order to make zero economic profit?Explanation / Answer
a. Charles explicit cost = Mowing equipment + Gasoline cost + Pay of helper + Depreciation
Explicit cost = 3,000 + 1.90(400) + 25(400) + 20% of $ 3,000 = 3,000 + 760 + 10,000 + 600 = $ 14,360
Per lawn cost = 1.90 + 25 = $ 26.90
Total explicit cost = $ 14,360
b. Implicit cost = $ 5,000 + 3% of $ 3,000 = $ 5,000 + $ 90 = $ 5,090
c. Accounting profit = Total Revenue - Total explicit cost = 30 X 400 - 13,760 = 12,000 - 13,760 = $ - 1,760
Economic Profit = Total revenue - Total Cost (Explicit cost + Implicit cost) = 12,000 - (13,760 + 5,090)
= 12,000 - 18,850 = $ - 6,850
d. To make zero profit, Charles charge the price at which TR = TC
PX 400 = 14,360
P = 14,460/400 = $ 36.15