[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Table 6.3
DEBORAH’S COSTS IF SHE WORKS 10 HOURS
DOING WEB CONSULTING
Fixed Costs Variable Costs Total
Sunk costs
Software $125.00 $125.00
Laptop lease $ 60.00 $ 60.00
Opportunity costs
Forgone earnings $50.00 $ 50.00
Total $185.00 $50.00 $235.00
Revenue $200.00
Profit $ (35.00)
Example: Deborah’s Web Consulting Business A simple example illustrates
these various cost concepts and relates them to the notions of opportunity
costs introduced in Chapter 2.
Deborah tutors for the computer science department at her college, earning $5
per hour. She works a total of 20 hours per week, which is the most she can devote
to working while still maintaining good grades in her own courses. Recently, she
decided to start her own business helping professors create Web pages for their
classes. Deborah plans to charge $20 per hour for this service.
To get started, she had to purchase $125 worth of software, and she needed to
obtain a faster laptop. A local computer store leased her the laptop she needs for
$60 per month.
Tables 6.3 and 6.4 set out the costs Deborah faces in her first week of business
if she works 10 hours for her new business (and continues to work 10 hours tutoring)
and if she works 20 hours for her new business (and so quits tutoring completely).
Since Deborah has already purchased the software and leased the computer,
these are fixed costs; they remain the same whether she decides to work 10 hours
or 20 hours on her new business. These are also sunk costs; even if she decides to
quit, she will be out the cost of the software and the first month’s lease on the laptop.
What are her variable costs? Variable costs are costs that depend on the number
of hours Deborah devotes to her Web business. For each additional hour she spends
on her Web business, she works 1 hour less tutoring. The opportunity cost of each
hour working in her new business is the $5 she could have made if she had instead
spent the hour tutoring. So her variable costs consist of the $5 per hour she gives up
by not tutoring.
We can now calculate Deborah’s profits for the week. If she works 10 hours, her
revenue is $200 (10 hours × $20 per hour). Her total costs are $125 + $60 + $50 =
$235. She suffers a loss of $35. If she works 20 hours, her revenue rises to $400,
while her total costs rise only to $125 + 60 + $100 = $285. She makes a profit of
140 ∂ CHAPTER 6 THE FIRM'S COSTS