Question

Ahmad, 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 Ahmad’s explicit cost, implicit cost, accounting profit and economic profit.

2. Should Ahmad take the burger stall concession? Why or why not?

Answer 1

(a)

Number of weekly hours at stall = 8 x 7 = 56

Revenue = 300 x $3 = $900

Explicit cost ($) = Burger cost + Rent = (300 x 1.5) + 150 = 450 + 150 = 600

Implicit cost ($) = Income given up = (10 x 40) + (56 - 40) x (1.5 x 10) = 400 + (14 x 15) = 400 + 210 = 610

Accounting profit ($) = Revenue - Explicit cost = 900 - 600 = 300

Economic profit ($) = Accounting profit - Implicit cost = 300 - 610 = - 310

(b)

Since economic profit is negative, he should not take the burger stall.