Question # 01: What is Micro Economics? Briefly explain

Macro Economics. Also explain the factors to be studied in

both Micro & Macro Economics in detail.

Answer:

Microeconomics

The field of economics is broken down into two distinct areas of study:

microeconomics and macroeconomics. Microeconomics looks at the

smaller picture and focuses more on basic theories of supply and demand

and how individual businesses decide how much of something to produce

and how much to charge for it. People who have any desire to start their

own business or who want to learn the rationale behind the pricing of

particular products and services would be more interested in this area.

The branch of economics that analyzes the market behavior of individual

consumers and firms in an attempt to understand the decision-

making process of firms and house holds. It is concerned with the

interaction between individual buyers and sellers and the factors that

influence the choices made by buyers and sellers. In particular,

microeconomics focuses on patterns of supply and demand and the

determination of price and output in individual markets.

Microeconomics is the study of decisions that people and businesses

make regarding the allocation of resources and prices of goods and

services. This means also taking into account taxes and regulations

created by governments. Microeconomics focuses on supply and demand

and other forces that determine the price levels seen in the economy. For

example, microeconomics would look at how a specific company could

maximize it's production and capacity so it could lower prices and better

compete in its industry.

Macroeconomics

The field of economics that studies the behavior of the aggregate

economy. Macroeconomics examines economy-wide phenomena such as

changes in unemployment, national income, rate of growth, gross

domestic product, inflation and price levels.

Macroeconomics on the other hand, is the field of economics that

studies the behavior of the economy as a whole and not just on specific

companies, but entire industries and economies. This looks at economy-

wide phenomena, such as Gross National Product (GDP) and how it is

affected by changes in unemployment, national income, rate of growth,

and price levels. For example, macroeconomics would look at how an

increase/decrease in net exports would affect a nation's Capital Account

or how GDP would be affected by unemployment rate.

While these two studies of economics appear to be different, they are

actually interdependent and complement one another since there are

many overlapping issues between the two fields. For example, increased

inflation (macro effect) would cause the price of raw materials to increase

for companies and in turn affect the end product's price charged to the

public.

Macroeconomics is focused on the movement and trends in the economy

as a whole, while in microeconomics the focus is placed on factors that

affect the decisions made by firms and individuals. The factors that are

studied by macro and micro will often influence each other, such as the

current level of unemployment in the economy as a whole will affect the

supply of workers which an oil company can hire from.

The bottom line is that microeconomics takes a bottoms-up approach to

analyzing the economy while macroeconomics takes a top-down

approach. Regardless, both micro- and macroeconomics provide

fundamental tools for any finance professional and should be studied

together in order to fully understand how companies operate and earn

revenues and thus, how an entire economy is managed and sustained. 

Source:

http://www.investopedia.com/terms/m/

microeconomics.asp

Factors to in Micro & Macro Economics

Balance of Trade

The balance of trade (or net exports, sometimes symbolized as

NX) is the difference between the monetary value of exports and

imports in an economy over a certain period of time. It is the

relationship between a nation's imports and exports. A positive

balance of trade is known as a trade surplus and consists of

exporting more than is imported; a negative balance of trade is

known as a trade deficit or, informally, a trade gap. The balance

of trade is sometimes divided into a goods and a services balance.

Physical balance of trade

Monetary balance of trade is different from physical balance of

trade (which is expressed in amount of raw materials). Developed

countries usually import a lot of primary raw materials from

developing countries at low prices. Often, these materials are then

converted into finished products, and a significant amount of value

is added. Although for instance the EU (as well as many other

developed countries) has a balanced monetary balance of trade, its

physical trade balance (especially with developing countries) is

negative, meaning that in terms of materials a lot more is imported

than exported. (http://en.wikipedia.org/wiki/Balance_of_trade)

Balance of Payment

In economics, the balance of payments, (or BOP) measures the

payments that flow between any individual country and all other

countries. It is used to summarize all international economic

transactions for that country during a specific time period, usually a

year. The BOP is determined by the country's exports and imports

of goods, services, and financial capital, as well as financial

transfer. It reflects all payments and liabilities to foreigners (debits)

and all payments and obligations received from foreigners (credits).

Balance of payments is one of the major indicators of a country's

status in international trade, with net capital outflow.

The balance, like other accounting statements, is prepared in

a single currency, usually the domestic. Foreign assets and

flows are valued at the exchange rate of the time of

transaction.

National Income

A variety of measures of national income and output are used

in economics to estimate total economic activity in a country or

region, including GDP, Gross National Product (GNP), and Net

National Income (NNI).

There are three main ways of calculating these numbers; the

output approach, the income approach and the expenditure

approach. In theory, the three must yield the same, because total

expenditures on goods and services (GNE) must equal the total

income paid to the producers (GNI), and that must also equal the

total value of the output of goods and services (GNP).

However, in practice minor differences are obtained from the

various methods for several reasons, including changes in

inventory levels and errors in the statistics. This is because goods

in inventory have been produced (therefore included in GNP), but

not yet sold (therefore not yet included in GNE). Similar timing

issues can also cause a slight discrepancy between the value of

goods produced (GNP) and the payments to the factors that

produced the goods, particularly if inputs are purchased on credit,

and also because wages are collected often after a period of

production

Per Capita Income

Per capita income means how much each individual receives, in

monetary terms, of the yearly income generated in the country.

This is what each citizen is to receive if the yearly national income

is divided equally among everyone. Per capita income is usually

reported in units of currency per year (e.g. US$20,000 per year).

When comparing nations per capita income reflects gross national

product per capital income, but it is also used to compare

municipalities within nations. When determining the per capita

income of a community, the total personal income is divided by the

population.

If the real per capita income increases over a long period of time, it

will indicate that country is making economic development

http://en.wikipedia.org/wiki/Per_capita_income

Question # 02 (a):What is inflation? Differentiate between inflation & hyper inflation, with examples.

Inflation:

The rate at which the general level of prices for goods and services is

rising and subsequently, purchasing power is falling. Central banks

attempt to stop severe inflation, along with severe deflation, in an

attempt to keep the excessive growth of prices to a minimum.

As inflation rises, every dollar will buy a smaller percentage of a good. For

example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02

in a year.

Hyperinflation

In economics, hyperinflation is inflation that is "out of control," a

condition in which prices increase rapidly as a fiat paper currency loses

its value. Formal definitions vary from a cumulative inflation rate over

three years approaching 100% (Today, many goods exceed the 100%) to

"inflation exceeding 50% a month." In informal usage the term is often

applied to much lower rates. As a rule of thumb, normal inflation is

reported per year, but hyperinflation is often reported for much shorter

intervals, often per month.

The definition used by most economists is "an inflationary cycle without

any tendency toward equilibrium." A vicious circle is created in which

more and more inflation is created with each iteration of the cycle.

Although there is a great deal of debate about the root causes of

hyperinflation, it becomes visible when there is an unchecked increase in

the money supply or drastic debasement of coinage, and is often

associated with wars (or their aftermath - Iraq, Afghanistan), economic

depressions, and political or social upheavals.

http://www.investopedia.com/terms/h/hyperinflation.asp

Question 02 (b)

Inflation can have a number of negative effects on the economy. Explain at least four of them with some suggestions to tackle such problems.

Answer:

Inflation can cause a number of negative effects on the economy of a

country. As inflation rises at creeping rate i.e. @ 2-3% per annum, it helps

grow the economy, as the purchasing power of the consumer is

increased, he buys more, when he buys more, new demands are

generated, to meet the new demands production is enhanced to meet the

market demands. Such rate of inflation can lead to a positive growth of

the people as well as the economy on the whole. But unfortunately

negative effects are more than the positive effects. The followings are the

main effects of Inflation:

High Cost of Goods/Services Lower Savings Unemployment

High Cost of Goods/Services

When inflation rises at the galloping speed, it decreases the purchasing

power of the consumer. A consumer would buy fewer goods against more

spending. The consumer would not be able to match his income with

expenses. When the purchasing power of the consumer decreases,

demands falls automatically, therefore, production process would also

slow down, and ultimately the growth of the economy drops.

Lower Savings:

Inflation hits indirectly to the savings in one way or the other both on

micro and macro level. When cost of necessary goods increases due to

inflation, purchasing power of the consumer decreases, and to meet

income with expenses, consumer would spend the savings to fill the gap.

Due to inflationary effect on prices, most effected community is of

salaried persons, whose salary does not increase occasionally as

compared to other segments of the community. Salaried person has to

survive within the limits of his fixed income.

Fiscal Policy

Fiscal policy refers to government attempts to influence the direction of

the economy through changes in government taxes, or through some

spending (fiscal allowances). It is the use of government spending and

revenue collection to influence the economy

Fiscal policy can be contrasted with the other main type of economic

policy, monetary policy, which attempts to stabilize the economy by

controlling interest rates and the supply of money. The two main

instruments of fiscal policy are government spending and taxation.

Changes in the level and composition of taxation and government

spending can impact on the following variables in the economy:

Aggregate demand and the level of economic activity;

The pattern of resource allocation;

The distribution of income.

Monetary policy

Monetary policy is the process by which the government, central bank,

or monetary authority of a country controls (i) the supply of money, (ii)

availability of money, and (iii) cost of money or rate of interest, in order

to attain a set of objectives oriented towards the growth and stability of

the economy Monetary theory provides insight into how to craft optimal

monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a

contractionary policy, where an expansionary policy increases the total

supply of money in the economy, and a contractionary policy decreases

the total money supply. Expansionary policy is traditionally used to

combat unemployment in a recession by lowering interest rates, while

contractionary policy involves raising interest rates in order to combat

inflation. Monetary policy should be contrasted with fiscal policy, which

refers to government borrowing, spending and taxation.

Structural change

Structural change of an economy refers to a long-term widespread

change of the fundamental structure, rather than micro scale or short-

term output and employment. For example, a subsistence economy is

transformed into a manufacturing economy, or a regulated mixed

economy is liberalized. A current structural change in the world economy

is globalization.

Fisher (1939) and Clark (1940) look at patterns in changes in sectoral

employment. The logic of their arguments being that patterns of

production are functions of the level of income and that resource and

production shifts are an integral part of development. The major

determinant of these shifts is the income elasticity of demand. Goods or

sectors for which there is a high income elasticity of demand will grow in

importance as income grows. Countries start with their production

dominated by primary production, then secondary activities start to

dominate and finally the tertiary sector dominates.

Structural change can be initiated by policy decisions or permanent

changes in resources, population or the society. The downfall of

communism, for example, is a political change that has had far-reaching

implications on the economies dependent on the state-run Soviet

economy. Structural change involves obsolescence of skills, vocations,

and permanent changes in spending and production resulting in

structural unemployment.

Short-term economical challenges can be managed with short-term fiscal

or monetary policy decisions, and fluctuations are expected to even out

in a few years. Managing structural change requires long-term

investments such as education, and reforms aimed at increasing labor

mobility. The Trade Adjustment Assistance is an example of such a

program

http://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Structural_change

Question # 03 (a)

Describe the role of price as rationing device?

Answer:

The invisible hand – the workings of the price mechanism

Adam Smith, one of the Founding Fathers of economics famously wrote of the “invisible hand of the price mechanism”. He described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society’s best interest. This remains the central view of all free-market economists, i.e. those who believe in the virtues of a free-market economy with minimal government intervention.

The price mechanism is a term used to describe the means by which the many millions of decisions taken each day by consumers and businesses interact to determine the allocation of scarce resources between competing uses. This is the essence of economics!

 

The price mechanism plays three important functions in any market-based economic system:

The signaling function

The price of digital printing is coming down – this will have an effect on the demand for substitute forms of image printing. How will traditional photo imaging retailers respond?

 

Firstly, prices perform a signaling function. This means that market prices will adjust to demonstrate where resources are required, and where they are not.

Prices rise and fall to reflect scarcities and surpluses. So, for example, if market prices are rising because of high and rising demand from consumers, this is a signal to suppliers to expand their

 

production to meet the higher demand.

Consider the left hand diagram on the next page. The demand for computer games increases and as a result, producers stand to earn higher revenues and profits from selling more games at a higher price per unit. So an outward shift of demand ought to lead to an expansion along the market supply curve.

In the second example on the right, an increase in market supply causes a fall in the relative prices of digital cameras and prompts an expansion along the market demand curve

Conversely, a rise in the costs of production will induce suppliers to decrease supply, while consumers will react to the resulting higher price by reducing demand for the good or services.

The transmission of preferences

Through the signalling function, consumers are able through their expression of preferences to send important information to producers about the changing nature of our needs and wants. When demand is strong, higher market prices act as an incentive to raise output (production) because the supplier stands to make a higher profit. When demand is weak, then the market supply contracts. We are assuming here that producers do actually respond to these price signals!

One of the features of a free market economy is that decision-making in the market is decentralised in other words, the market responds to the individual decisions of millions of consumers and producers, i.e. there is no single body responsible for deciding what is to be produced and in what quantities. This is a remarkable feature of an organic market system.

The rationing function

Prices serve to ration scarce resources when demand in a market outstrips supply. When there is a shortage of a product, the price is bid up – leaving only those with sufficient willingness and ability to pay with the effective demand necessary to purchase the product. Be it the demand for tickets among England supporters for the 2006 World Cup or the demand for a rare antique, the market price acts a rationing device to equate demand with supply.

The prices for using the M6 Toll Road are a good example of the rationing function of the price mechanism. A toll road can exclude those drivers and vehicles that are not willing or able to pay the current toll charge. In this sense, motorists and road haulage businesses and other road users are paying for the right to use the road, road space has a market price instead of being regarded as something of a free good. The current charges are below:

Prices on the M6 Toll Road June 2006

  Day  (06:00 - 23:00)

  Night  (23:00 - 06:00)

  Class 1 (e.g. motorbike)   £2.50   £1.50

  Class 2 (e.g. car)   £3.50   £2.50

  Class 3 (e.g. car & trailer)   £7   £6

  Class 4 (e.g. van/coach)   £7   £6

  Class 5 (e.g. HGV)   £7   £6

What would happen if the day-time charges increased to £5 for cars?

The growing popularity of auctions as a means of allocating resources is worth considering as a means of allocating resources and clearing a market. The phenomenal success of EBAY is testimony to the power of the auction process as a rationing and market clearing mechanism as internet usage has grown.

The price mechanism is the only allocative mechanism solving the economic problem in a free market economy. However, most modern economies are mixed economies, comprising not only a market sector, but also a non-market sector, where the government (or state) uses the planning mechanism to provide public goods and services such as police, roads and merit goods such as education, libraries and health.

In a state run command economy, the price mechanism plays little or no active role in the allocation of resources. Instead government planning directs resources to where the state thinks there is greatest need. The reality is that state planning has more or less failed as a means of deciding what to produce, how much to produce, how to produce and for whom. Following the collapse of communism in the late 1980s and early 1990s, the market-based economy is now the dominant economic system – even though we are increasingly aware of imperfections in the

operation of the market – i.e. the causes and consequences of market failure.

Prices and incentives

Incentives matter enormously in our study of microeconomics, markets and instances of market failure. For competitive markets to work efficiently all economic agents (i.e. consumers and producers) must respond to appropriate price signals in the market.

Market failure occurs when the signalling and incentive function of the price mechanism fails to operate optimally leading to a loss of economic and social welfare. For example, the market may fail to take into account the external costs and benefits arising from production and consumption.  Consumer preferences for goods and services may be based on imperfect information on the costs and benefits of a particular decision to buy and consume a product. Our individual preferences may also be distorted and shaped by the effects of persuasive advertising and marketing to create artificial wants and needs.

Government intervention in the market

Often the incentives that consumers and producers have can be changed by government intervention in markets. For example a change in relative prices brought about by the introduction of government subsidies and taxation. Suppose for example that the government decides to introduce a new tax on aviation fuel in a bid to reduce some of the negative externalities created by the air transport industry.

How will airlines respond?

a. Will they pass on the tax to consumers?

b. Can they absorb the tax and seek cost-savings elsewhere in their operations?

If the tax raises price for air travellers, will they change their behaviour in the market?

Is an aviation tax the most effective way of controlling pollution? Or could incentives for producers and behaviour by consumers wanting to travel by air be changed through other more effective and efficient means?

Agents may not always respond to incentives in the manner in which textbook economics suggests. The “law of unintended consequences” encapsulates the idea that government policy interventions can often be misguided of have unintended consequences! See the revision focus article on government failure.  Author: Geoff Riley, Eton College, September 2006  

http://tutor2u.net/economics/revision-notes/as-markets-price-mechanism.html

Question # 03 (b)

The Government gains revenue by imposing a sales tax. Who stands to lose the most, the consumer or the producer, or both? Quote original examples.

Answer:

Whether a sales tax is levied on buyers or sellers makes no difference to the price paid by the consumers, the price received by producers, and the volume of the goods sold. Nor does it make any difference to the government’s revenue from taxation; it is the same for both scenarios. The only difference occurs in the diagrammatic exposition. I a graph of the tax on sellers, the supply curve shifts up and to the left by the amount of the tax per unit, whereas in a tax on buyers the demand curve shifts down and to the left. In both cases, there will be a wedge driven between the price paid and the price received.

When the sales tax is introduced, it leaves the demand curve intact while it raises the supply curve by the amount of the tax, supply curve represents the quantities that a firm is to offer at alternative prices. When the tax is levied, the price charged by the sellers must reflect the tax. Therefore, the supply curve jumps up (a decrease in supply) by the amount of the tax. This shift is a parallel shift since the amount of tax is fixed and does not change with the volume of consumption. The tax-inculsive supply curve reflects the fact that sellers are willing to supply the same quantities only if they get paid the tax amount more than before. The added amount to the price is the sellers’ new obligation to the government. In other words, sellers are willing to sell as much goods as before at the same (net of the tax) prices.

Price of Gasoline (Per Litre)

B0.53

0.50

0.48 A C

30 40Quantity (Millions of Litres)

At the new equilibrium, point B, the price has risen and the volume of transactions has fallen.

However, the equilibrium price of $ 0.53 is the price paid by the consumers. Note that the price does not rise by the full amount of 5 cents to consumers even though the government has levied a 5 cent tax.

A final point of this analysis is how the burden of the tax is shared between the two sides. In this example, the consumers’ share of the new sales tax (3 cents) is greater than the producers’ share (2 cents). In general, who gets to pay a bigger portion of the tax is a function of the slopes of the demand & supply curve. The steeper the gasoline demand curve, the greater the portion of the 5 cents that will be paid by consumers; the flatter the demand curve, the smaller the consumers’ share. Also, the flatter the supply curve, the bigger the portion paid by the consumers and vice versa.

Question # 04 (b)

In what respect would you expect determinant of demand for computers to differ from determinants of the demand for milk?

Answer:

Demand:

In economics the concept of demand is employed to describe the quantity of a good or service that a household can, or a firm chooses, to buy at a given price.

Market Demand & Individual Demand:

The market demand for a good or service is simply the total quantity that all the customers in the economy are willing to demand per time period at a given price.

Determinants of Demand:

The amount of a product that consumers wish to buy in a given time period is influenced by the following variables:

1. Product’s own choice

2. The price of related products

3. Average income of households

4. Tastes & Preferences

5. Income Distribution

6. Population

Difference between determinants of demand for Computers & Milk:

While determining the determinants for Milk & computers, we would have to distinguish between needs, wants & demands. Since milk is one of our basic needs, and does not constitute wants or demand, therefore, it has very limited determinants as compared to computers are very few. Whereas the determinants of demand for computers above factors play a role. Computers are not a basic need for every person, so we can put this product under wants & demands.

As the relationship between price and quantity, is subject to change over time due to changes in the underlying factors held constant by the static notion of demand. Changes in demand "shifters" are often included in economic estimation of demand representing anticipated dynamics in these determinants.

Levels of income

A key determinant of demand is the level of income evident in the appropriate country or region under analysis. Generally, the higher the level of aggregate and/or personal income the higher the demand for a typical commodity, including dairy products. More of a good or service will be chosen at a given price where income is higher. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP).

Population

Population is of course a key determinant of demand. Although all dairy products do not necessarily enter final consumer markets, the actual markets are largely presumed to be functionally related to population. Growing populations are positively correlated to dairy products demands in the aggregate, as well as specifically to individual dairy products. Frequently, population and income estimators are combined, as in the case of the use of Gross Domestic Product per capita.

End market indicators

The use of end market indicators as determinants of demand is frequently incorporated into demand analysis. For example, much of the final use of dairy products is linked to domestic users..

Availability and price of substitute goods

Consumption choices related to dairy products are also influenced by the alternative options facing users in the relevant marketplace. The availability of potential substitute products, and their prices, weigh heavily in determining the elasticity of demand, both in the short run (static) sense and over time (long run).

Suitability of alternative goods and services is, in part, a question of knowledge as well as availability. Market information regarding alternative products, quality, convenience, and dependability all influence choices. Under conditions of increased scarcity and rising prices for dairy products, for example, users have a positive incentive to search for and investigate the suitability of alternatives that were previously overlooked or ignored.

Tastes and preferences

All markets are shaped by collective and individual tastes and preferences. These patterns are partly shaped by culture and partly implanted by information and knowledge of products and services (including the influence of advertising). Different

societies use dairy products differently because of these differences in taste and preferences. For example, markets for milk products in USA are commonly recognized as requiring very high product quality standards, the importance of visual attributes of milk, and other preferences not commonly found in many other markets.

http://www.fao.org/docrep/w4388e/w4388e0t.htm

Question # 05:

Answer:

Definitions of Important Terms:

Explicit cost

An Explicit cost is an easy accounted cost, such as wage, rent and

materials. It can be transacted in the form of money payment and is lost

directly, as opposed to monetary implicit cost.

Implicit cost

In economics, an implicit cost occurs when one foregoes an alternative

action but does not make an actual payment. (For instance, the explicit

cost of a night at the movies includes the moviegoer's ticket and soda,

but the implicit cost includes the pay he would have earned if he had

chosen to work instead.) Implicit costs are related to forgone benefits of

any single transaction

Economic Profit

An economic profit arises when its revenue exceeds the total

(opportunity) cost of its inputs, noting that these costs include the cost of

equity capital that is met by "normal profits." A business is said to be

making an accounting profit if its revenues exceed the accounting cost

of the firm. Economics treats the normal profit as a cost, so when

deducted from total accounting profit what is left is economic profit (or

economic loss).

a) Total Explicit Costs of running the Variety Store

Store Rent $ 25,000.00

Business Taxes $ 15,000.00

Total Explicit Cost $ 40,000.00

Total Implicit Costs

Profit @ 20% on $ 80,000.00 $ 16,000.00

Family annual Wages $ 90,000.00

Total Implicit Cost $ 106,000.00

b) Accounting Profit of the Variety Store

Revenue $

480,000.00

Less Cost of products $ 350,000.00

Store Rent $ 25,000.00

Business Taxes $ 15,000.00

Total Cost $

390,000.00

Accounting Profit $ 90,000.00

c) Economic Profit of the Variety Store

Revenue $

480,000.00

Less Cost of products $ 350,000.00

Store Rent $ 25,000.00

Business Taxes $ 15,000.00

Estimated wages $ 90,000.00

Estimated Profit $ 16,000.00

Total Cost $

496,000.00

Economic Profit/ (Loss) $ (16,000.00)

d) Profit is the factor income of the entrepreneur. The definition may be explained in the following manner; there are four factors of production: Land, Labor, Capital & Organization. The corresponding reward of the factors are rent, wage & salary, interest and finally profit.An economic profit arises when its revenue exceeds the total (opportunity) cost of its inputs, noting that these costs include the cost of equity capital that is met by “normal profits”. A business is said to be making an accounting profit if its revenues exceed the accounting cost of the firm. Economics treat the normal profit as a cost, so when deducted from total accounting profit what is left is economic profit (or economic loss).

All enterprises can be stated in financial capital of the owners of the enterprises. The economic profit may include an element if recognition of the risks that an investor takes. It is often uncertain, because of incomplete information, whether an enterprise will succeed or not. This extra risk is included in the minimum rate of return that providers of financial capital require and so is treated as still a cost within economics. The size of that return is commensurate with the riskiness associated with each type of investment, as the risk-return spectrum.

Economic profit does not occur in perfect competition in long run equilibrium. Once risk is accounted for, long-lasting economic profit is thus viewed as the result constant cost-cutting and performance improvement ahead of industry competitors, or an inefficiency caused by monopolies or some form of market failure.

e) Though the business is earning “Accounting Profit” but while considering the “Economic Profit” the firm incurred loss. The owner of any business concern calculates his profits keeping in view both Accounting & Economic profits, therefore, it’s best for my friend to close down his business to avoid any future loss.