Leah is the owner of a sunflower shop that earns 0 (zero) economic profit. Last year, her total revenue was $225,000, her rent was $10,000, her labor costs were $85,000, and her overhead expenses were $11,000.
a. What were Leah's total explicit costs? provide an incorrect answer
b. What were Leah's total implicit costs?
c. Currently, Leah has 8 employees; with 8 employees, her sunflower shop can produce 12 wedding bouquets per day. If she hired a ninth employee, shed be able to produce 16 wedding bouquets per day. What is the marginal product, in terms of wedding bouquets, of the ninth employee?
Leah's Sunflower Shop: Analyzing Costs and Marginal Productivity
Leah, the owner of a sunflower shop, faces various costs while running her business. Let's delve into her explicit and implicit costs, as well as analyze the concept of marginal productivity.
Total Explicit Costs
a. Leah's total explicit costs can be calculated by summing up all the explicit expenses she incurs in her business operations. Based on the information provided:
- Rent: $10,000
- Labor Costs: $85,000
- Overhead Expenses: $11,000
Total Explicit Costs = Rent + Labor Costs + Overhead Expenses = $10,000 + $85,000 + $11,000 = $106,000
However, to provide an incorrect answer, let's say the total explicit costs were $115,000.
Total Implicit Costs
b. Implicit costs are the opportunity costs of using resources in a particular way instead of the next best alternative. In Leah's case, her implicit costs would include the value of her time and any other resources that she owns and uses for her business without explicit payment.
As an entrepreneur, Leah might have invested her savings into the business or foregone a higher-paying job to run the shop. These implicit costs are not easily quantifiable but play a significant role in assessing the true cost of running the sunflower shop.
Marginal Productivity of the Ninth Employee
c. The marginal product measures the change in output resulting from a one-unit change in an input while keeping other inputs constant. In Leah's scenario, with 8 employees, her shop produces 12 wedding bouquets per day. By hiring a ninth employee, the output increases to 16 wedding bouquets per day.
Marginal Product of the Ninth Employee = Change in Output / Change in Input = (16 - 12) / (9 - 8) = 4 wedding bouquets per day
Therefore, the marginal product of the ninth employee is 4 wedding bouquets per day, indicating the additional output gained by employing one more worker.
In conclusion,
understanding both explicit and implicit costs is crucial for business owners like Leah to make informed decisions about their operations. Additionally, analyzing marginal productivity helps in optimizing resource utilization for efficient business performance.