[testgirl1111]

You have been working for home-building companies for a number of years. You enjoy construction work, and now you want to start your own home-building company that you will run yourself.

You quit your previous job that had been paying $40,000 per year. You have $40,000 in your savings account that you withdraw to start this company. The savings account had been paying you 5% interest. Because the $40,000 from your savings is not enough to start the company, you also borrow $2,300,000 from the bank. (The bank manager is willing to loan you such a large amount because he knows of your reputation and experience in the home-building industry.) You use the money to hire workers and buy the tools, machinery, and raw materials with which you will build houses.

The cost per worker is $20,000 per year. In your first year, you plan to hire 48 workers to do the construction work, which means that the annual labor cost of your company will be $960,000 (48 x $20,000). With 48 workers, your company can build seven houses.

You must also buy raw materials--land, wood, nails, plasterboard, and so forth. Each house requires $20,000 worth of raw materials. The cost of raw materials for seven houses is $140,000 (7 x $20,000).

Finally, the bank charges 6% interest on your loan. The interest cost is $138,000 (6% of $2,300,000).


What are the total implicit costs for your construction company?