Mike quits his doctor job in a public hospital, where he was earning a salary of $100,000 per year, to start his own private clinic in a building that he owns and was previously renting out for $24,000 per year. In his first year of business, he has the following expenses: Operating expenses, $80,000; rent, $0; wages paid to other staff, $50,000. Find the accounting cost and the economic cost associated with Mike’s business
Question
Mike quits his doctor job in a public hospital, where he was earning a salary of 24,000 per year. In his first year of business, he has the following expenses: Operating expenses, 0; wages paid to other staff, $50,000. Find the accounting cost and the economic cost associated with Mike’s business
Solution
The accounting cost of Mike's business is the total monetary expenses he incurred in the first year. This includes the operating expenses and wages paid to other staff.
Step 1: Add the operating expenses to the wages paid to other staff. Operating expenses = 50,000 Accounting cost = Operating expenses + Wages paid to other staff Accounting cost = 50,000 = $130,000
The economic cost of Mike's business is the total opportunity cost of all the resources used in his business. This includes the accounting cost and the opportunity cost of Mike's time and the building he owns.
Step 2: Calculate the opportunity cost of Mike's time and the building. Opportunity cost of Mike's time = His salary at the public hospital = 24,000
Step 3: Add the opportunity costs to the accounting cost to get the economic cost. Economic cost = Accounting cost + Opportunity cost of Mike's time + Opportunity cost of the building Economic cost = 100,000 + 254,000
So, the accounting cost associated with Mike's business is 254,000.
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