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Assume that you have taken 12 months' leave without pay from your full-time job as a dressmaker and set up a business ironing and repairing clothes
Assume that you have taken 12 months' leave without pay from your full-time job as a dressmaker and set up a business ironing and repairing clothes. You have taken out a 12-month lease on a small shopfront in a suburban shopping centre. You have bought all the equipment you need for your business and arranged the fit-out of your premises to accommodate your work requirements. You have paid for these set-up costs out of your previous savings. You will not be able to buy any more equipment during the next 12 months. For the year, your total explicit costs are $25 500 and your implicit costs are $45 000.
Question your short-run period, how would the law of diminishing returns be likely to apply if the business was doing so well that you started taking on extra staff members and also What is you economic profit if total revenue is $80,000
Expert Solution
If we hire extra staff members there will be crowding because we have spend all our savings and now we are not able able to buy any equipment in next 1 year. Because of too many workers using the same equipment it will lead to diminishing marginal product of workers as there will be too much staff for too little equipment.
Economic profit = Revenue - Explicit cost - Implicit cost
= 80,000 - 45000 - 25500
= $9500
Accounting profit = Revenue - Explicit cost
= 80000 - 25500
= $54,500
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