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

costs of buying additional paint and brushes—but for the sake of simplicity, let’s
assume that he started off the summer with all the paint he needed. Thus, his
variable costs were related to the labor he needed to hire.
Variable costs are also related to the amount of time it takes to paint a house,
which depends in part on the quality of the labor available. The variable costs for
Presto Painters were as follows:
Houses
Hours of
painted labor hired Payroll cost
5 100 $ 1,000
10 300 $ 3,000
15 600 $ 6,000
20 1,000 $10,000
25 1,500 $15,000
30 2,100 $21,000
Number
Marginal cost
of homes Total cost Average cost (per house)
0 $ 9,000
5 $10,000 $2,000 $ 200
10 $12,000 $1,200 $ 400
15 $15,000 $1,000 $ 600
20 $19,000 $ 950 $ 800
25 $24,000 $ 960 $1,000
30 $30,000 $1,000 $1,200
Given this information, Michael could calculate cost curves for Presto Painters
(see above).
Based on his marginal and average cost curves, Michael figured that if market
conditions allowed him to charge $1,000 or more for a typical house, then he could
make a profit by painting at least 25 houses. Roughly speaking, that is how his summer
worked out; painting 25 houses for $1,000 apiece. Thus, he earned $1,000 in profits.
Or so he thought. Nowhere on this list of costs did Michael consider the opportunity
cost of his time. He was not getting paid $10 an hour for painting houses; he
was out there stirring up business, hiring and organizing workers, taking calls from
customers, dealing with complaints.
Imagine that Michael had an alternate job possibility: waiting on tables. He could
earn $6 per hour (including tips) and work 40-hour weeks during a 12-week summer
vacation. Thus, he could have earned $2,880 during the summer with little stress
or risk. If this opportunity cost is added to the fixed costs of running the business,
then his apparent profit turns into a loss. Since Presto Painters did not cover Michael’s
opportunity cost and compensate him for the risk and aggravation of running his
own business, he would have been financially better off sticking to the business of
filling people’s stomachs rather than painting their houses.
170 ∂ CHAPTER 7 THE COMPETITIVE FIRM