Before last year, Ellie (Luke's wife) taught music and earned $30,400. She also earned $9,600 by renting out their basement as a studio apartment. Ellie saves every month. At the end of a typical year she would have saved a total of 10% from her wages and the income earned from the basement for the entire year, and earned a total of 0.5% in interest (for the entire year). At the beginning of last year, Ellie stopped teaching music. She also stopped renting out their basement, and began to use it as the office for her new web design business. The balance on her savings account was $150,000, and she took $5,000 from this account to buy a new laptop computer and a new printer (which also functions as a scanner and a facsimile). She also borrowed $12,000 from the local bank to purchase additional machinery and equipment (a graphics tablet, desktop computer, studio camera and an external hard drive). Her loan payment is $250 per month. During last year, she paid $3,000 for the lease of a web server and $2,400 for high-speed internet service. She also spent $3,600 purchasing miscellaneous supplies for her business. At the end of last year, Ellie received a total revenue from web site designing of $48,250 and earned 5% interest on her savings account balance (for the entire year). After the first year of operation, Luke (who has his own successful business) believes that Ellie made the right decision. However,Ellie feels a bit skeptical and believes that she should have remained as a music teacher. Before getting into the web design business, she would have saved some of her total earnings, but now, with the web design business, she is not adding any money to her saving account. Also, doing a bit of research, she realizes that the market value (at the end of last year) for the laptop computer and the printer is $4000. [a.] Calculate Ellie's accounting profit for last year. [b.] Calculate Ellie's economic profit for last year. [c.] Given question [a.] and question [b.], whose assessment (Ellie's or Luke's) on Ellie's allocation of her resources is correct? Why? [d.] Calculate Ellie's implicit cost1
Before last year, Ellie (Luke's wife) taught music and earned $30,400. She also earned $9,600 by renting out their basement as a studio apartment. Ellie saves every month. At the end of a typical year she would have saved a total of 10% from her wages and the income earned from the basement for the entire year, and earned a total of 0.5% in interest (for the entire year). At the beginning of last year, Ellie stopped teaching music. She also stopped renting out their basement, and began to use it as the office for her new web design business. The balance on her savings account was $150,000, and she took $5,000 from this account to buy a new laptop computer and a new printer (which also functions as a scanner and a facsimile). She also borrowed $12,000 from the local bank to purchase additional machinery and equipment (a graphics tablet, desktop computer, studio camera and an external hard drive). Her loan payment is $250 per month. During last year, she paid $3,000 for the lease of a web server and $2,400 for high-speed internet service. She also spent $3,600 purchasing miscellaneous supplies for her business. At the end of last year, Ellie received a total revenue from web site designing of $48,250 and earned 5% interest on her savings account balance (for the entire year). After the first year of operation, Luke (who has his own successful business) believes that Ellie made the right decision. However,Ellie feels a bit skeptical and believes that she should have remained as a music teacher. Before getting into the web design business, she would have saved some of her total earnings, but now, with the web design business, she is not adding any money to her saving account. Also, doing a bit of research, she realizes that the market value (at the end of last year) for the laptop computer and the printer is $4000. [a.] Calculate Ellie's accounting profit for last year. [b.] Calculate Ellie's economic profit for last year. [c.] Given question [a.] and question [b.], whose assessment (Ellie's or Luke's) on Ellie's allocation of her resources is correct? Why? [d.] Calculate Ellie's implicit cost1
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Before last year, Ellie (Luke's wife) taught music and earned $30,400. She also earned $9,600 by renting out
their basement as a studio apartment. Ellie saves every month. At the end of a typical year she would have
saved a total of 10% from her wages and the income earned from the basement for the entire year, and
earned a total of 0.5% in interest (for the entire year). At the beginning of last year, Ellie stopped teaching
music. She also stopped renting out their basement, and began to use it as the office for her new web
design business. The balance on her savings account was $150,000, and she took $5,000 from this account
to buy a new laptop computer and a new printer (which also functions as a scanner and a facsimile). She
also borrowed $12,000 from the local bank to purchase additional machinery and equipment (a graphics
tablet, desktop computer, studio camera and an external hard drive). Her loan payment is $250 per month.
During last year, she paid $3,000 for the lease of a web server and $2,400 for high-speed internet service.
She also spent $3,600 purchasing miscellaneous supplies for her business. At the end of last year, Ellie
received a total revenue from web site designing of $48,250 and earned 5% interest on her savings account
balance (for the entire year). After the first year of operation, Luke (who has his own successful business)
believes that Ellie made the right decision. However,Ellie feels a bit skeptical and believes that she should
have remained as a music teacher. Before getting into the web design business, she would have saved
some of her total earnings, but now, with the web design business, she is not adding any money to her
saving account. Also, doing a bit of research, she realizes that the market value (at the end of last year) for
the laptop computer and the printer is $4000.
[a.] Calculate Ellie's accounting profit for last year.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa30c029d-ea3e-4f2b-9013-d3f476d0ee50%2Fed96d82c-1b78-4481-8c14-ac689f62255c%2Flj8r9ux_processed.png&w=3840&q=75)
Transcribed Image Text:Before last year, Ellie (Luke's wife) taught music and earned $30,400. She also earned $9,600 by renting out
their basement as a studio apartment. Ellie saves every month. At the end of a typical year she would have
saved a total of 10% from her wages and the income earned from the basement for the entire year, and
earned a total of 0.5% in interest (for the entire year). At the beginning of last year, Ellie stopped teaching
music. She also stopped renting out their basement, and began to use it as the office for her new web
design business. The balance on her savings account was $150,000, and she took $5,000 from this account
to buy a new laptop computer and a new printer (which also functions as a scanner and a facsimile). She
also borrowed $12,000 from the local bank to purchase additional machinery and equipment (a graphics
tablet, desktop computer, studio camera and an external hard drive). Her loan payment is $250 per month.
During last year, she paid $3,000 for the lease of a web server and $2,400 for high-speed internet service.
She also spent $3,600 purchasing miscellaneous supplies for her business. At the end of last year, Ellie
received a total revenue from web site designing of $48,250 and earned 5% interest on her savings account
balance (for the entire year). After the first year of operation, Luke (who has his own successful business)
believes that Ellie made the right decision. However,Ellie feels a bit skeptical and believes that she should
have remained as a music teacher. Before getting into the web design business, she would have saved
some of her total earnings, but now, with the web design business, she is not adding any money to her
saving account. Also, doing a bit of research, she realizes that the market value (at the end of last year) for
the laptop computer and the printer is $4000.
[a.] Calculate Ellie's accounting profit for last year.
![[b.] Calculate Ellie's economic profit for last year.
[c.] Given question [a.] and question [b.], whose assessment (Ellie's or Luke's) on Ellie's allocation of her
resources is correct? Why?
[d.] Calculate Ellie's implicit cost1](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa30c029d-ea3e-4f2b-9013-d3f476d0ee50%2Fed96d82c-1b78-4481-8c14-ac689f62255c%2Fak3sd1l_processed.png&w=3840&q=75)
Transcribed Image Text:[b.] Calculate Ellie's economic profit for last year.
[c.] Given question [a.] and question [b.], whose assessment (Ellie's or Luke's) on Ellie's allocation of her
resources is correct? Why?
[d.] Calculate Ellie's implicit cost1
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