Kai's records show that last month he spent $5,000 on rent for his shop, $3,000 on materials, $3,000 on wages and benefits for an employee, and $500 in interest on the loan that he used to start his business. He quit a job that had paid him $3,000 a month to devote himself full time to this business. Suppose that he has to pay the lease on his shop and the interest on the loan regardless of whether he produces. However, suppose that at any time he can change the amount of materials that he buys and the hours that his employee works and that he can also go back to his old job (perhaps part time).
a. What are the accounting costs of operating his shop for the month?
b. What are the economic costs?
c. Which types of costs of running his business for a month are fixed? Which are variable?