When Burton Cummings graduated with honors from the Canadian Trucking Academy, his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton’s rig rent for $15,000 per month. If Burton was driving trucks for one of the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 - $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm.

Question

When Burton Cummings graduated with honors from the Canadian Trucking Academy, his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton’s rig rent for $15,000 per month. If Burton was driving trucks for one of the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 - $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm.

1)Compute both Burton Cummings’s explicit costs per month and his implicit costs per month.
2)Compute the opportunity cost of the resources used by Burton Cummings each month.

Answer 1

1) To compute Burton Cummings's explicit costs per month, we need to consider the costs that require a direct outlay of money. In this case, his explicit costs would include fuel, maintenance, and depreciation expenses. According to the information provided, these costs amount to $18,000 per month.

To compute Burton Cummings's implicit costs per month, we need to consider the opportunity cost of not using his resources in their next best alternative. In this case, since Burton could be driving trucks for a competing trucking firm and earning $5,000 per month, that would be his implicit cost. Therefore, Burton Cummings's implicit costs per month are $5,000.

2) The opportunity cost of the resources used by Burton Cummings each month can be computed by comparing his current situation to the next best alternative. In this case, the resources used would include his time and the tractor-trailer rig given by his father.

If Burton were working for a trucking firm, he would earn $5,000 per month. Therefore, the opportunity cost of his time is $5,000.

If Burton were to rent his tractor-trailer rig instead of using it himself, he could earn $15,000 per month. Therefore, the opportunity cost of using his rig is $15,000.

Taking both the opportunity cost of his time and the opportunity cost of using his rig into account, the total opportunity cost of the resources used by Burton Cummings each month is $5,000 + $15,000 = $20,000.

sdw

1) To compute Burton Cummings's explicit costs per month, we need to consider the costs that require a direct outlay of money. In this case, his explicit costs would include fuel, maintenance, and depreciation expenses. According to the information provided, these costs amount to $18,000 per month.