Sally Quit Her Job as an Auto Mechanic Earning $50

question 169

Essay

Sally quit her job as an auto mechanic earning $50 000 per year to start her own business.To save money,she operates her business out of a small building she owns which,until she started her own business,she had rented out for $10 000 per year.She also invested her $20 000 savings (which earned a market interest rate of 5% per year)in her business.You are given the following information about the first year of her operations.
Total revenue $120 000
Cost of labour 40 000
Cost of materials 15 000
Equipment rental 5 000
a.Calculate her economic costs.
b.Calculate her accounting costs.
c.Calculate her implicit costs.
d.Sally tells you that she would really like to move to a location closer to town but she decided against it because 'right now I don't pay any rent and it will cost me $10 000 a year to rent near town.' Do you agree with her reasoning?
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Definitions:

Pulse Pressure

The difference between systolic and diastolic blood pressure readings, indicating the force that the heart generates each time it contracts.

Left Atrium

The upper left chamber of the heart that receives oxygenated blood from the lungs and pumps it into the left ventricle.

Left Ventricle

The chamber of the heart responsible for pumping oxygenated blood to the body.

Mitral Valve

A valve in the heart that lies between the left atrium and the left ventricle, regulating blood flow.