Two University Graduates, Bill and Steve, Worked for an Advertising

question 272

Essay

Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of $40,000 each for 3 years after they graduated. Then, they decided to quit their jobs and start a partnership that designs and builds Web sites. They rented an office for $12,000 a year and bought capital for $30,000. To pay for the equipment, Bill and Steve borrowed money from a bank at an annual interest rate of 6 percent. During their first year of operation, the partners' total revenue was $100,000. The market value of their capital at the end of the year was $20,000. If Bill and Steve do not design Web pages, their best alternatives are to return to their previous job.
a) What is the firm's economic depreciation?
b) What are the partnership's costs?
c) What is the firm's economic profit in the first year of operation?

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Definitions:

Omission Training

A learning process in which a response leads to the removal of an expected reward or positive outcome, thereby decreasing the likelihood of that response in the future.

Response Cost

A behavior modification technique that involves the loss of a reward or privilege following undesired behaviors to decrease their occurrence.

Timeout

A form of behavioral modification that involves temporarily removing an individual from an environment where undesirable behavior has occurred, to decrease the likelihood of that behavior reoccurring.

Effectiveness

The degree to which something achieves a desired or intended result or outcome.