Mangerial Economics 640

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640 BUS Managerial Economics 1. Title Opportunity Costs When Burton Cummings graduated with honors from the Canadian Trucking Academy, his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burtons rig rent for $15,000 per month. If Burton was driving trucks for one of the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm. Compute both Burton Cummingss explicit costs per month and his implicit costs per month. Explicit costs are defined by Thomas and Maurice (2011) as the monetary opportunity costs of using market-supplied resources (p 9). Burton Cummings explicit costs are $18,000. In addition, implicit costs are $7,000 (revenue operating costs). Thomas and Maurice describe these costs as nonmonetary opportunity costs of using owner-supplied resources (2011, p 9). Compute the opportunity cost of the resources used by Burton Cummings each month. Opportunity costs are described by Thomas and Maurice as what a firms owners give up to use resources to produce goods or services (2011, p 8). Burton Cummings opportunity costs each month are $13,000. He currently nets $7,000 (revenue expense) and he has an opportunity to net $20,000 ($5,000 salary + $15,000 rental income + 0 expenses = $20,000. What advice would you give Burton Cummings? Explain your advice in terms of opportunity costs. I would advise Burton Cummings to remain employed and bringing in a salary. This income, coupled with the rental income from renting out his tractor-trailer

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