Question
You are considering leaving your current job to start a new company that develops applications for cell phones. Your current job pays $75,000 per year.
You are considering leaving your current job to start a new company that develops applications for cell phones. Your current job pays $75,000 per year. If you leave your current job, you expect yourself to sell about 50,000 units during the 1st year at a price of $4 per unit. With annual overhead costs and operating expenses amounting to $145,000, you also expect a profit margin of 20%, which is 5% larger than that of your largest competitor.
If you decide to embark on your new venture, what will your accounting costs be during the first year of operation? Your implicit costs? Your opportunity costs?
Suppose that your estimated selling price is lower than originally projected during the first year. How much revenue would you need in order to earn positive accounting profits? Positive economic profits?
What is the intuition behind your answers to part (b)? Why should you consider economic profits?
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