Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Microeconomics Expert

Need the following additional question answered for the below response.
Note: 
1. P15(d): Compare the present value of economic profit in each of the next three years and the loss of $50,000 in the third year using 15% as the discount rate.

Integrating problem Samantha Roberts has a job as a pharmacist earning $30, 000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $40,000 per year or to purchase a pharmacy that generate revenue of $200,000 per year. To purchase the pharmacy Samantha would have to use her $20,000 savings and borrow another $80,000 at interest rate of 10 percent per year.
The pharmacy that Samantha is contemplating purchasing has additional expenses of $80, 000 for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities. Assume that income and business taxes are zero and that the repayment of the principal of the loan does not start before three years.
a. What would be the business and economic profit if Samantha purchased the pharmacy? 
b. Supposed that Samatha expects that another pharmacy will open nearby at the end of three years and that this will drive the economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in three years?
c. What theory of profit would account for profits being earned by the pharmacy during the first 3 years of operation? 
d. Suppose that Samatha expects to sell the pharmacy at the end of the 3 years for $50,000 more than the price she paid for it and that she requires a 15 percents return on her investment. Should she still purchase the pharmacy?


Question from Dominick Salvatore's Managerial Economics in A Global Economy 8th Ed. textbook 

Additional Requirements 
Answer a)
Business profit = total revenue - total business cost (or explicit cost) 
= revenue - supplies - interest on loan - utilities - hired help - rent 
= 200000- 80000 - (80000*0.1) - 5000 - 40000 -10000 
= $57000
Economic profit = business profit - interest rate forgone on saving amount - opportunity cost of purchasing pharmacy 
= 57000 - (20000*0.1) - 40000= $15000
Samantha should purchase the pharmacy because economic profit is positive
Answer b)
If revenue is equal to economic cost economic profit would be zero.
Economic cost = interest on loan + supplies + rent + utilities + interest rate forgone on saving amount + hired help + opportunity cost of purchasing pharmacy = $185000
Revenue per year would be $185000
Answer c)
In the given case Samantha Jones is having no competitors in initial three years. She is operating alone and there is no nearby competitor. It is theory of monopoly in which Samantha earned handsome business and economic profits. 
Answer d) 
If Samantha sells the pharmacy after three years she is expected to get
50000+20000*0.15+80000*(Interest to be received - interest to be paid) 
= 50000+20000*0.15+80000*(0.15-0.10) = $57000
If Samantha had worked as manager, she could have earned $120000 (40000*3) after 3 years. 
Hence, Samantha should work as manager instead of purchasing the pharmacy. 

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91267276

Have any Question?


Related Questions in Microeconomics

Choose five concepts that characterize a price floor

Choose five concepts that characterize a price floor. Maximum legal price set by government Allocative inefficiency arises Minimum legal price set by government Permanent shortage results Price below equilibrium price Pe ...

Questionnbsppeople join tennis clubs for a fixed fee per

Question:  People join tennis clubs for a fixed fee per year, which entitles them to play as much as they want without charge. Because people who pay these fees play more tennis than others (who can use free public court ...

Question is a tax on margarine efficient in the economic

Question: Is a tax on margarine efficient in the economic sense of the term? Why would margarine producers prefer to have an excise tax impose on both butter and margarine? Would such a tax be more or less efficient than ...

Question if economists generally agree that fixed-weight

Question: If economists generally agree that fixed-weight price indexes overstate the actual rate of inflation, why is the CPI still the most popular and widely quoted measure of inflation? The response must be typed, si ...

Question an auto repair shop is considering purchasing

Question: An auto repair shop is considering purchasing automated paint-spraying equipment. The company estimates that the equipment will last five years. Each year, it will save the company $4,000 in paint wasted in the ...

Question what advantages do the two countries have that

Question: What advantages do the two countries have that make one or both of them candidates for trade and investment for that specific industry? Industry: Hospitality (Hotel) Countries: UAE and United Kingdom

Question the director of a nonprofit foundation that

Question: The director of a nonprofit foundation that sponsors 8-week summer institutes for graduate students analyzed the costs and expected revenues for the next summer institute and recommended that the session be can ...

Question the bank of montreal bmos assets include cash in

Question: The Bank of Montreal (BMO)'s assets include cash in the vault which is one third of it's deposits at the Bank of Canada. BMO has $700,000 in loans, $1.1 million in securities as well as $2.0 million in chequing ...

Question purpose of assignmentthis assignment will help

Question: Purpose of Assignment This assignment will help students master research and other analytical skills and will help students recognize reasons why economic growth varies by country. By using macroeconomic indica ...

Question engineering economicassignment submittion due in 8

Question: Engineering Economic Assignment: Submittion due in 8 June 2017 1. Discuss the role of engineering economics in your organization. Identify and describe the nature and types of any two engineering economic decis ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As