Question

Sonya used to earn $25,000 a year selling real estate, but she now sells greeting cards. The return to entrepreneurship in the greeting cards industry is $14,000 a year. Over the year, Sonya bought $10,000 worth of cards from manufacturers and sold them for $58,000. Sonya rents a shop for $5,000 a year and spends $1,000 on utilities and office expenses. Sonya owns a cash register, which she bought for $2,000 with funds from her savings account. Her bank pays 3 percent a year on savings accounts. At the end of the year, Sonya was offered $1,600 for her cash register. Calculate Sonya’s explicit costs, implicit costs, and economic profit for the year.​

Answer 1

Calculate Sonya's explicit costs -

Explicit costs = Value of cards bought from manufacturers + Rent + Utilities and office expenses

Explicit costs = $10,000 + $5,000 + $1,000

Explicit costs = $16,000

Sonya's explicit costs is $16,000.

Calculate Sonya's implicit costs -

Implicit costs are as follows -

1. Salary foregone = $25,000

2. Return to entrepreneurship = $14,000

3. Economic depreciation = $2,000 - $1,600 = $400

4. Interest foregone = $2,000 * 0.03 = $60

Implicit cost = $25,000 + $14,000 + $400 + $60 = $39,460

Sonya's implicit costs are $39,460.

Calculate economic profit -

Economic profit = Revenue - Explicit costs - Implicit costs

Economic profit = $58,000 - $16,000 - $39,460 = $2,540

The economic profit is $2,540.