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April 19, 2014

Homework Help: Economics

Posted by Cindy on Thursday, October 19, 2006 at 5:49pm.

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.

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