(Part I)  Suppose a successful college professor, earning $40,000 per year, decides to quit academia to start a computer software business.  The professor buys several different kinds of computers and converts the student apartment above the garage in to a workshop.  The apartment had been renting for $300 per month ($3600 per year), and the professor could rent all the computer equipment for $5,000 per year.  Five part-time student programmers are hired at $500 per month each ($30,000 total per year) and the utility bill runs $500 per month ($6,000 per year).  What revenues will the professor require to obtain an economic profit?

(Part 2)  In a short-run period, where only labor costs vary (assume the utility costs do not vary over the output ranges the professor considers), the professor can hire students for $6,000 per year to produce software packages.  The firm sells the rights to another firm that handles distribution and sales.  The professor estimates that the firm will produce one package with one student, 3 with 2 students, 7 with 3, 10.5 with 4, 13.5 with 5, 16 with 6, 18 with 7, 19.5 with 8, 20.5 with 9, and 21 with 10 employees.

1. Use this information to construct a table of the different short-run average costs and then diagram the different curves.
2. With a smaller number of programmers they share notes and help one another solve problems.  However, as the number of programmers increases, they begin to compete with one another for time on the different computers.  At which point in hiring employees do the negative effects begin to dominate?  What do we call this point?

Source: Binger/Hoffman, p. 271-274.