Technical Questions (20 marks)

25. Daniel is a school teacher who earned $40,000 in 2017. He resigned from his job the following year and opened a business for himself. Below is some information regarding his business at the end of first year of operation:

He stopped renting out his flat for $3,500 a year and used it as his factory. The market value of the flat increased from $60,000 to $61,000.

He spent $40,000 on raw materials, etc.

He leased machines for $10,000 a year.

He paid $15,000 in wages.

He used $10,000 from his savings account, which earns 5 percent a year interest.

He borrowed $40,000 at 10 percent a year.

He sold $160,000 worth of goods.

Normal profit is $25,000 a year.

A. Calculate Daniels's opportunity cost of production and his economic profit. [Hint: Subtract appreciation of the flat when calculating the total opportunity cost; depreciation is added while appreciation is subtracted] (7 marks)

B. Calculate the accounting profit if the depreciation cost amounts to $5000 in 2018. (3 marks)

26. Use the graph in Figure 1 to answer the following questions.

Figure 1

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