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

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.Burton Cummings’s explicit costs per month = $18000

2.Opportunity cost = If he would have rented it , he would have earned $15,000 + Gain in not spending the $18,000 on maintenance + $5000 that he would have earned by himself driving for one of the competing firms, which totals to $38,000