Professor Martin is considering leaving the university and opening a consultant business. His services as a consultant he would be paid $75,000 a year. To open the business professor Martin must convert a house from which he collects rent of $10,000/year for office space and hire a secretary at a salary of $15,000 a year. He must also withdraw $10,000 from his savings account for misc. expenses and must forgo earning 10% interest per year. The university pays the professor Martin $50,000 as professor a year. Based only on economic decision making predict if this professor will leave or stay?
I was thinking that the professor would stay at the university. Is this correct? Thanks in advance! :)
His net annual income in the consultant business would be 75,000 - 15,000 = 60,000, and he would lose $1000 in interest on the savings he has to take out to pay setup expenses. That makes 59,000 net gain. The college job pays him 50,000 and he gets 10,000 by renting out the office space . That's 60,000.
Keeping the college job provide better cash flow, and there will be no loss of the 10,000 from savings for expenses.
There may also be fringe benefits he would not receive when self-employed.
I believe she will stay because she won't loose out on any money, the money is going to always come in.
Yes, you are correct. Based on economic decision-making, it would be more beneficial for Professor Martin to stay at the university.
If he decides to open a consultant business, his net income would be $59,000 after considering the cost of hiring a secretary, converting the house, and forgoing the interest on his savings.
On the other hand, by staying at the university, he receives a salary of $50,000 as a professor and collects $10,000 from renting out the office space. This brings his total income to $60,000, which is higher than the income from the consultant business.
Additionally, there may be fringe benefits that he receives as a university employee, such as healthcare or retirement benefits, which he would not receive if he were self-employed. Therefore, it is more financially advantageous for Professor Martin to stay at the university rather than leaving to open a consultant business.
Your analysis is correct. Based on economic decision making, it would be more advantageous for Professor Martin to stay at the university rather than leave and open a consultant business. Let's break down the reasoning:
- Net Income from Consultant Business: The professor would make $75,000 as a consultant, but after deducting the secretary's salary of $15,000 and the $1,000 in lost interest on savings, the net income would be $59,000.
- Income from University Job: As a professor, he would earn $50,000. Additionally, he collects $10,000 per year from renting out the office space, totaling $60,000.
By opting to stay at the university, Professor Martin would have a net gain of $60,000, which is higher than the $59,000 net gain from the consultant business. Therefore, from an economic standpoint, it would be more beneficial for him to stay at the university.
Additionally, it's important to consider potential fringe benefits that the professor might receive as an employee. These benefits, such as health insurance, retirement plans, and paid time off, could further contribute to his overall financial well-being.
It's worth noting that other non-economic factors, such as personal fulfillment or the desire for more independence, could also influence Professor Martin's decision. However, based solely on economic decision making, staying at the university seems to be the more advantageous choice.