Question

James, a college student, generally spends his holidays working for the university as a research assistant doing data entry at a wage rate of $10.00 per hour for a 40-hour week. Overtime work is always available at an hourly rate of 1.5 times the regular wage rate. For the coming holidays, he has been offered a burger stall concession at the student affairs building which would have to be open 8 hours per day, 7 days a week. He estimates that he can sell 300 burgers a week at $3.00 each. The production cost of each burger is $1.50 and the rent on the stall is $150 per week.

1. Calculate James's explicit cost, implicit cost, accounting profit and economic profit.
2. Should James's take the burger stall concession? Why or why not?

Answer 1

Answer 1 -

Explicit cost = 300*1.5 + 150

= 450+150

= $ 600

Implicit cost = 10*40

= $ 400

Accounting profit = Revenue - Explicit cost

= (300*3)-600

= 900-600

= $ 300

Economic profit = Accounting profit - Implicit cost

= 300-400

= (-100) dollars

Answer - James should not take the burger stall concession. This is because the economic profit of James is negative. This means that he will loose his income if he opts for the burger stall. Hence this alternative should not be chosen because of the negative economic profits or economic loss.