Q1: True or false: A business making a positive accounting profit should always operate?

Q2: Frank is thinking about quitting his teaching job, which pays $75,000 per year, to own and operate his own food truck business. If he starts the business, he will spend $90,000 to purchase a truck and appliances (which he feels is a better option than renting the physical capital). This amount of money would come from two sources: $35,000 would be borrowed from a bank at an interest rate of 4% per year and $55,000 would come from Frank's savings, which are currently earning interest of 0.6% per year in a no-risk savings account but could earn 11% if invested in an alternative such as corporate bonds that were equally risky as his intended food truck business. Frank expects his food truck business will spend $70,000 per year on assistants, $17,000 per year on food and beverages, and $5,000 per year on other costs such as gasoline, propane, and food containers. The truck and appliances are expected to have a useful life of 8 years and a scrap value of $2,000 and Frank expects to use straight-line depreciation. Frank expects to pay himself a salary of $15,000 per year while operating his food truck business. Finally, he expects the food truck business to generate total revenues of $170,000 per year after it has been operating for several years and has matured.

a) What are the expected annual explicit costs of Frank's intended food truck business AND what do they add up to?

b) What are the expected annual implicit costs of Frank's intended food truck business AND what do they add up to?

Hint: There are only two implicit costs.

c) What is the expected annual accounting profit of Frank's intended food truck business?

d) What is the expected annual economic profit of Frank's intended food truck business?

e) What amount of income would Frank earn annually if he operated his food truck business?

Hint: Follow the actual money that flows to Frank.

f) What amount of income would Frank earn annually if he chose the best alternative to operating his food truck business?

g) Would an economist recommend that Frank start the food truck business? Explain.

Q3: Talia is deciding whether to operate her own consulting business or to continue working as a marketing assistant for another employer, where she earns $45,000 a year. If she operates her own business, she expects to spend $70,000 in rent, $50,000 for assistants, and $24,000 on her own salary (all annual figures). Also, she will have to use her savings of $60,000, which is earning interest of 2% per year in a savings account and borrow $80,000 at an interest rate of 7% per year to purchase $140,000 worth of computer equipment and furniture that will depreciate by $17,500 per year. Talia expects the business to generate total revenues of $200,000 per year after it has been operating for several years and has matured. Finally, businesses that are equally risky as her intended consulting business are generating a return of 18% per year for investors.

a) What are the expected annual implicit costs of Talia's intended consulting business AND what do they add up to?

Hint: there are only two implicit costs.

b) What are the expected annual explicit costs of Talia's intended consulting business AND what do they add up to?

c) What is the expected annual economic profit of Talia's intended consulting business?

d) What is the expected annual accounting profit of Talia's intended consulting business?

e) What amount of income would Talia earn if she operated her consulting business?

Hint: Follow the actual money that flows to Talia.

f) What amount of income would Talia earn if she chose the best alternative to operating her own consulting business?

g) Would an economist recommend that Talia's start her own consulting business? Explain.

Q4: Janice operates her own business and pays herself a salary from her business. The implicit cost of Janice's time and effort in operating her business is equal to $0. How is this possible? Explain.