Question

John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows:

Expense	Amount
Labor	$2,000
Food and drink	500
Electricity	100
Vehicle lease	150
Rent	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? $ .

Answer 1

Ans a
Yes the café is making economic profit
No he should stay in café business
Opportunity cost	in $
1100--275	825	Economic profit
And accounting profit is	750
5000-2000-500-100-150-500-1000
As economicprofit is more than accounting profit by $75 hence
he should not stay in business
ans b
accounting profit is
5000-2000-500-100-150-500	1750
ans c
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