Managerial economics: Foundations of business analysis and strategy

1. At the beginning of the year, a software developer quit his job and gave up a salary of $90,000 per year in order to start Turnip Tom’s organic farm. A partial income statement for the first year of operation for Turnip Tom’s, Inc., is shown below: Revenues $ 98,000 Operating costs and expenses Cost of products sold $ 15,500 Selling expenses $ 6,500 Administrative expenses $ 3,200 Total operating costs $ 25,200 Income from Operations $ 72,800 Interest expense (bank loan) $ 9,500 Legal expenses $ 1,200 Income taxes $ 22,000 Net income $ 40,100 To get started, Tom spent $125,000 of his own savings to purchase land and equipment to be used for the farm. During this year, Tom could have earned a 7 percent return by investing in stocks of other business with risk levels similar to his farm. (a) What are the total explicit, total implicit, and total economic costs for the year? (b) What is accounting profit? (c) What is economic profit? (d) Using only the data given, would you say that the owner made a good economic decision to leave is job to start the organic farm? Explain.