Question 1 Currently, Jason is the shop manager of a famous cake shop and his annual salary is $390,000. Wealth accumulation is always his goal, so after having been working for 5 years in the same cake shop, Jason plans to start his own business - a pie-and-tart shop. The following is his draft business plan: . To finance his new business, he needs a start-up capital of $400,000. He plans to withdraw fund from his investment account that earns interest of 5% steadily every year. The rental contract of his new shop is one year and the monthly rental payment is $25,000. ⚫ His best friends promise to decorate the shop without charge as a gift to celebrate his new career development; Jason will save $120,000 for decoration. ⚫ To operate his business, he plans to spend $120,000 on the purchase of tools and equipment. The resale value of these items is $80,000 after a year of operation. Apart from these, he would recruit two full-time shop assistants with monthly salary of $11,000 per person as he will not involve in the daily operation of his new shop and continue to work in the famous cake shop. The other annual operating costs are estimated and shown in the table below: Items Ingredients Utility A baker's salary 360,000 56,600 264,000 At the beginning, Jason estimates the sales revenue of the first year to be $1,350,000. (a) Calculate Jason's annual explicit cost, annual implicit cost and economic profit of operating his own new pie-and-tart shop for the first year based on the given data. List the relevant item in your calculation and show your working. (b) Base on your calculation in part (a), what is your recommendation to Jason? Explain. (c) Rosa, Jason's colleague, is an experienced baker. Rosa is interested in starting up the pie-and-tart shop with Jason together. She suggests if she owns the shop with Jason together, she could quit her job and take up the baker's role in the shop instead of hiring one. Under this new situation, how would the economic profit/loss calculated in your answer of part (a) change and become/remain an economic loss? Explain.

Question 1 Currently, Jason is the shop manager of a famous cake shop and his annual salary is $390,000. Wealth accumulation is always his goal, so after having been working for 5 years in the same cake shop, Jason plans to start his own business - a pie-and-tart shop. The following is his draft business plan: . To finance his new business, he needs a start-up capital of $400,000. He plans to withdraw fund from his investment account that earns interest of 5% steadily every year. The rental contract of his new shop is one year and the monthly rental payment is $25,000. ⚫ His best friends promise to decorate the shop without charge as a gift to celebrate his new career development; Jason will save $120,000 for decoration. ⚫ To operate his business, he plans to spend $120,000 on the purchase of tools and equipment. The resale value of these items is $80,000 after a year of operation. Apart from these, he would recruit two full-time shop assistants with monthly salary of $11,000 per person as he will not involve in the daily operation of his new shop and continue to work in the famous cake shop. The other annual operating costs are estimated and shown in the table below: Items Ingredients Utility A baker's salary 360,000 56,600 264,000 At the beginning, Jason estimates the sales revenue of the first year to be $1,350,000. (a) Calculate Jason's annual explicit cost, annual implicit cost and economic profit of operating his own new pie-and-tart shop for the first year based on the given data. List the relevant item in your calculation and show your working. (b) Base on your calculation in part (a), what is your recommendation to Jason? Explain. (c) Rosa, Jason's colleague, is an experienced baker. Rosa is interested in starting up the pie-and-tart shop with Jason together. She suggests if she owns the shop with Jason together, she could quit her job and take up the baker's role in the shop instead of hiring one. Under this new situation, how would the economic profit/loss calculated in your answer of part (a) change and become/remain an economic loss? Explain.

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 1.2P

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