Phil the Pharmacist currently is working for the Gregory Pharmacy Company earning $40,000 in salary per year. He works 6 days per week and travels one hour in each direction to and from work each day. Phil values his own time at $9.00 per hour. Phil only works 50 weeks out of the year, for he always takes his two weeks paid vacation. He receives two simultaneous offers one day. Offer number one is to take a new job at a different pharmacy for a $60,000 salary. His commute would decrease to one-half hour in each direction, but he would still be working 6 days per week. His second offer is to open/buy a pharmacy of his own. That pharmacy would generate revenue of $200,000 for the first year. If Phil decides to buy his own pharmacy, it will cost him $100,000 to purchase, and he will have to take out an $80,000 loan from the bank at a 10% interest rate. The bank, for the first year, wants one payment of interest only at the end of the year (i.e., they are charging Phil simple interest for the first year). He will also have to use $20,000 of his own savings for the remainder of the funds. Currently his savings is earning 6% interest. If he buys the pharmacy, his commute will be 1.5 hours in each direction 6 days per week, and he will have to pay rent of 7,000 per year, buy supplies costing him 42,000 per year, hire an assistant at $35,000 per year, and pay for utilities that amount to 25,000 per year. You need to give Phil some advice. You should probably also review the concepts of explicit and implicit costs, opportunity cost, and economic profit before you give him any advice.
a. If he leaves his current job and takes job offer number one, how much more economic income will Phil be earning? Explain and justify your answer in detail.
b. For the first year only, if Phil decides to open up his own pharmacy, how much economic income (or economic profit) will his pharmacy earn? What are the revenue and costs that Phil needs to consider in order to make a properly informed decision. Explain and justify your answer in detail.
c. What should Phil do? Keep his current job? Switch to the new job? Or buy and open the pharmacy?