Question 1)

Sarah has recently decided to quit her full-time job as a chef and open her own

restaurant. The full-time job would have earned her $50,000 a year. Sarah needs to spend

$30,000 buying stoves, ovens, fryers and other equipment for the restaurant. She could

come up with $10,000 from her own saving; the saving has been earning her $1,000 a

year in interest receipt. The remaining amount ($20,000) is borrowed from her parents

(interest free).

Sarah estimates that the cost for rent, staff wages and food will be $30,000, $20,000 and

$15,000 per year respectively. Also, the estimated annual revenue of the restaurant will be

$100,000.

a.

From all the costs above, determine which are explicit costs, which are implicit costs

b.

Calculate the accounting profit and the economic profit for Sarah's restaurant. From a

purely economic point of view, would you recommend Sarah to quit her current job

and open her own restaurant?

c.

As stated above, Sarah needs to spend $30,000 buying various equipment for her

restaurant. Would this $30,000 be considered a cost? Clearly explain why.