QUESTION THREE
Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of
$40,000 each for 3 years after they graduated. Then, they decided to quit their jobs and start a
partnership that designs and builds Web sites. They rented an office for $12,000 a year and bought
capital for $30,000. To pay for the equipment, Bill and Steve borrowed money from a bank at an
annual interest rate of 6 percent. During their first year of operation, the partners' total revenue was
$100,000. The market value of their capital at the end of the year was $20,000. If Bill and Steve do
not design Web pages, their best alternatives are to return to their previous job.
a) What is the firm's economic depreciation? (5 marks)
b) What are the partnership's costs? (5 marks)
c) What is the firm's economic profit in the first year of operation? (5 marks)