Question

Jon quit his job as a manager at North End Savings bank where he earned $92,000 a year. He cashed in $200,000 in corporate bonds that earned 1.5% interest annually to set up a gym. Jon has decided to buy a store front and set up exercise classes. There are 850 people who will pay $1200 a year for unlimited classes; $800 from each person goes for instructors, maintenance, equipment, insurance, depreciation etc.

A. What are Jon’s total revenues?

B. What are Jon’s explicit costs? In numbers

C. What is his accounting profit? Numbers

D. List 2 in numbers 2 implicit costs that Jon has not included.

E. What is Jon’s pure economic profit (or loss) in numbers?

Answer 1

A. Jon's total revenue = fees per person * no. of persons = $1,200 * 850 = $1,020,000

B. Explicit costs = $800 from each person goes for instructors, maintenance, equipment, insurance, depreciation etc. = $800 * 850 = $680,000

C. Accounting profit = revenue - explicit costs = $1,020,000 - $680,000 = $340,000

D. Opportunity costs are the values foregone for selecting another alternative. Jon is foregoing $92,000 as wage and 1.5% interest on his $200,000 corporate bonds to start the business. So, the total opportunity costs = $92,000 + 1.5% of 200,000 = $92,000 + 1.5/100 * 200,000 = $92,000 + $3,000 = $95,000.

E.Economic profit = accounting profit - opportunity costs = $340,000 -  $95,000 = $245,000.