Betty runs a cookie shop where she sells cookies for $1 each. She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Betty $100,000 to come to work for them. She also knows she could sell her cookie shop for $150,000. The bank in town pays an annual interest rate of 3% on all funds deposited with it.

Reference: Ref 9-18

(Scenario: Betty's Cookie Shop) Betty's implicit and explicit costs are equal to:

A) $80,000.

B) $100,000.

C) $204,500.

D) $184,500.

C) $204,500.

Explanation:

Betty runs a cookie shop where she sells cookies for $1 each.

She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour.

Her costs of equipment and raw materials add up to $75,000.

Her business ability is legendary, and other companies have offered to pay Betty $100,000 to come to work for them.

She also knows she could sell her cookie shop for $150,000.

The bank in town pays an annual interest rate of 3% on all funds deposited with it.

Explicit

Salary = 5 x 500 x 10 = $25,000

Equipment & Raw Material = $75,000

Total implicit = $100,000

Implicit

1. If she runs her company it will cost her the $100,000 she would have earned if she worked for others.

2. If she runs her company it will cost her the interest of 3% on the $150,000 she would have earned if she sold the shop and kept her money in the bank. which is = 0.03 x 150,000 = $4,500

Total explicit = $104,500

Implicit and explicit = $100,000 + $104,500 = $204,500