Kevin Coughlin, a lawyer working for a large law firm and earning $60,000 per year is

contemplating setting up his own law practice. He estimates that renting an office would cost
$10,000 per year, hiring a legal secretary would cost $20,000 per year, renting the required office
equipment would cost $15,000 per year, and purchasing the required supplied, paying for electricity,
telephone, and so forth would cost another $5,000. The lawyer estimates that his total revenues for
the year would be $100,000, and he is indifferent between keeping his present occupation with the
large law firm and opening his own law office.

Earns $60K / yr. (I)

Office Rent $10K / yr. (E)
Legal sec. $20K / yr (E)
Office equipment $15K / yr. (E)
Utilities $5K / yr. (E)
Projected revenues $100K

a. How much would be the explicit costs of the lawyer for running his own law office for the year?
(10 + 2 + 15 + 5 ) $50,000.00.

b. How much would the accounting costs be? The implicit costs? The economic costs?
Accounting cost = $50,000.00. Implicit cost = $60,000.00 Economic costs = $110,000.00

c. Should the lawyer go ahead and start his own practice?

No, if his goal is to maximize profit. Instead of increasing profit the lawyer will incur a $10,000
([Profit = R - C] = [-10,000 = $100,000 - $110,000])
0 per year is
office would cost
ing the required office
ied, paying for electricity,
at his total revenues for
ent occupation with the

law office for the year?

omic costs?
ts = $110,000.00

wyer will incur a $10,000.00 loss by starting his own practice

Integrating Problem

TVC = 60Q - 12Q^2 + Q^3 a. average variable and marginal cost function of th
TFC = 100 USD Q TVC AVC
1 49 49
Price: 60USD 2 80 40
New tech, the long-run total coost would be, 3 99 33
TC = 50 + 20Q + 2w + 3r 4 112 28
w = wage rate 5 125 25
r = rental price 6 144 24
7 175 25
8 224 28
9 297 33
10 400 40
33

Chart Title
140

120

100

80

60

40

20

0
0 2 4 6
and marginal cost function of the firm b. the breakeven output of the firm and the output at which t
MC Profit = TR - TC
39 = 60Q - (100 + 60Q - 12Q^2 + Q^3)
24
15 BEP, Profit = 0
12
15 Q TR FC VC
24 1 60 100 49
39 2 120 100 80
60 3 180 100 99
87 4 240 100 112
120 5 300 100 125
6 360 100 144
7 420 100 175
Chart Title 8 480 100 224
9 540 100 297
10 600 100 400

Qbe = 3.64
Maxprofit = 8

4 6 8 10 12
e firm and the output at which the firm maximize its total profit

Q^2 + Q^3)

Profit
-89
-60
-19
28
75
116
145
156
143
100