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For the past 5 years, Sandi has worked as a data analyst earning $40,000 during her last year. She quit her job to start a

For the past 5 years, Sandi has worked as a data analyst earning $40,000 during her last year. She quit her job to start a consulting business. She has clients lined up and expects her revenue to be $70,000 in her first year. For her first year, she has rented equipment for $20,000, paid $3,000 for web access and hosting, $4,000 for the cost of phone and cable, and $2,000 for advertising. Sandi's uncle gave her $30,000, which she used to start her business. The current savings interest rate is 3%. Assume her business has been up and running for one year and revenue & costs were as expected.(Show all work for full marks)


1. Calculate accounting profit.(3 marks)

Accounting Profit = Total Revenue - Total Explicit Costs

$70,000 - ($20,000 + $3,000 + $4,000 + $2,000) = $41,000


2. Calculate economic profit.(3 marks)

Economic Profit = Total Revenue - (Total Explicit Costs + Total Implicit Costs)

Total Implicit Costs = Opportunity Cost of Sandi's capital

3% of $30,000 = $900

$70,000 - ($29,000 + $900) = $40,100


3. Calculate normal profit.(1 mark)

Normal profit occurs when the difference between a company's total revenue and combinedexplicitandimplicitcosts are equal to zero.

Normal Profit = Total Explicit Costs + Implicit Costs

$29,000 + $900 = $29,900


4. Should Sandi stay in business? Explain.(2 marks)

Yes, Sandi should stay in business because her economic profit is positive at $40,100. Her business is earning more than the minimum amount required to cover all her explicit costs and implicit costs - the opportunity cost of her capital.


The Artis Company hires employees at a wage rate of $10/hour. Other relevant data about the Artis Company is shown in the table below.

Employee Hours

Output

Marginal Product

Total Costs

Marginal Costs

Average Costs

0

0

N/A

100

N/A

N/A

2

20

20 - 0 = 20

100 + ($10 x 2) = 120

(120-100) / (20-0) = 1

120 / 20 = 6

4

50

50 - 20 = 30

100 + ($10 x 4) = 140

(140 - 120) / (50-20) = 0.67

140 / 50 = 2.8


6

90

90 - 50 = 40

100 + ($10 x 6) = 160

(160-140) / (90-50) = 0.50

160 / 90 = 1.78

8

80

80 - 90 = -10

100 + ($10 x 8) = 180

(180-160) / (80-90) = -2.00

180 / 80 = 2.25

10

60

60 - 80 = -20

100 + ($10 x 10) = 200

(200-180) / (60 -80) = -1.00

200 / 60 = 3.33


1. What are the firm's fixed costs?(1 mark)

Artis Company's fixed costs are the labour wage at $10/hour.


2. Fill in the table by calculating the marginal product, total costs, marginal costs, and average costs at each quantity of employee hours (round off to 2 decimals if needed)(8 marks)


3. Is the data in the table for the short-run or long-run? Explain.(2 marks)

The data in the table for the Artis Company is for the short run. In the short-run, at least one factor of production is fixed while others are variable. Employee hours worked is the variable while all other items are assumed to be fixed (as they aren't listed). The Output changes from additional employee hours worked is the proof.


Kamloops is located in the interior of British Columbia which has become a prominent wine growing area due to its mild and dry climate. A new winery has incurred the costs listed below. For each cost, state whether it is a fixed or variable cost.


1. The salary paid to the vintner who is a full-time employee.(1 mark)

Fixed


2. The cost of a grape picking machine used to pick some grape varieties.(1 mark)

Fixed


3. The wages paid to seasonal grape pickers.(1 mark)

Variable


4. The capital used to purchase an additional 50 acres of land.(1 mark)

Fixed


5. The cost of organic sprays to eliminate insect damage to the grapes.(1 mark)

Variable


6. The cost of the building with a wine tasting room.(1 mark)

Fixed


7. The cost of the wine used for the tastings.(1 mark)

Variable



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