John Jones owns and manages a café in Collegetown whose annual
revenue is $5,000. Annual expenses are as follows:
|Food and drink||500|
|Interest on loan for equipment||1,000|
a) Suppose John could earn $1,100 per year as a recycler of aluminum cans. However, he prefers to run the café and is willing to pay $275 per year to run the café rather than to recycle. Is the café making an economic profit?
(Click to select)Yes/No, the café is making an economic (Click to select)loss/profit of per year.
Should John stay in the café business? (Click to select)No, he should not stay in the café business Or Yes, he should stay in the café business.
b) Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of his own money in equipment.
Calculate John's annual accounting profit. $.
c) Suppose John could earn $1,000 a year as a recycler, and he likes recycling just as well as running the café.
How much additional revenue would the café have to collect each year to earn a normal profit? $ .
|Yes the café is making economic profit|
|No he should stay in café business|
|Opportunity cost||in $|
|And accounting profit is||750|
|As economicprofit is more than accounting profit by $75 hence|
|he should not stay in business|
|accounting profit is|
|It has to earn both expicit and implicit cost|
|Opportunity cost is $1000 and accounting profit is $750|
|So he has to earn $250 (1000-750) additional revenue|
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