Review
4. For each of the costs listed below, identify whether it is an explicit
or implicit cost to a firm. Which costs would be subtracted from a
firm’s total revenue to calculate economic profit, and which to
calculate accounting profit?
a. hourly wages to the firm’s employees
b. depreciation of the firm’s physical assets
c. the risk-free 2 percent return the firm’s owners could
receive on their financial capital instead of investing it in
the firm
d. annual rental payments for a production facility
e. the additional wages the owner/manager could have
received in alternative employment
f. the risk premium of 3 percent that the owners of the firm
could earn on their financial capital if they invested it in
an equally risky venture
5. A carpenter quits his job at a furniture factory to open his own
cabinetmaking business. In his first two years of operation, his
sales average $100 000 per year and his operating costs for wood,
workshop and tool rental, utilities, and miscellaneous expenses
average $70 000 per year. Now his old job at the furniture factory
is again available. What is the lowest wage at which he should
decide to return to his old job? Why?