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Compute the Annual Economic Cost
Compute the Annual Economic Cost. Edward the entrepreneur takes 2 hours to cut a lawn and he cuts 100 lawns per year. He uses solar-powered equipment (truck and mower) that will last forever and could be sold at any time for $20,000. Edward could earn $12 per hour as a pedicurist. The interest rate is 10%.
Expert Solution
Since Edward has no explicit variable costs, the economic costs associated with him mowing lawns for a year include:
- (1) the opportunity cost of not being a pedicurist for the year and
- (2) the interest foregone on the $20,000 tied up in the truck and mower, which costs 10% of that amount per year.
Therefore: the annual economic cost is calculated as follows:
- Annual economic cost = (Number of lawns * Hours to cut a lawn * hourly pedicurist rate foregone) + (Equipment value * interest rate)
- = (100 * 2 * $12) + ($20,000 * 0.10)
- = $2,400 + $2,000
- = $4,400.
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