SUBJECT: MANAGERIAL ECONOMICS

LESSON: TIME VALUE OF MONEY AND PROFIT - IMPLICIT AND EXPLICIT COSTS

PROBLEM #1: Defne and Yasmien have been good friends since high school. When they graduated in college, they decided to put up the "Passionista", a firm selling clothing lines for women. Both shared a capital of $75,000 as a start capital for their firm. In their first year they had sales revenue of $1 million. Passionista spent $600,000 on labor, and $200,000 on materials or supplies. Both Defne and Yasmien work for their company as a salesclerk and managers. Defne used to earn an annual income of $35,000 as logistic Manager while Yasmien left her salary of $20,000 as a designer for Passionista.

Questions:

1. What are considered Explicit Costs and Implicit costs? Explain each.
2. What was the firm's accounting profit?
3. What is the firm's economic profit last year if Passionista sits on land owned by Defne's family that it could rent for $30,000 per year?

PROBLEM #2: Larry Di Manalo has just bought a scratch lottery ticket and won $10,000. He wants to finance the future study of his newly born daughter and invests this money in a fund with a maturity of 18 years offering a promising yearly return of 6%. What is the amount available on the 18th birthday of his daughter?

1. What is the amount of future value or present value or annuity?
2. From future value of question 1, what is the present value if n=20?