Question

Refer to the table below. The table shows the monthly economic profit of a drugstore.

Total (gross) revenues per month	$ 27,000
less explicit costs:
Cost of merchandise sold	$17,000
Wages to cashier, stock, and delivery help	2,500
Rent and utilities	800
Taxes	700
Total explicit costs	$21,000
Accounting profit (revenue minus explicit costs)	$6,000
less implicit costs:
Wages of owner-manager, 300 hours @ $10 per hour	$3,000
Return on inventory, 10% per year on $120,000	1,000
Total implicit costs	$4,000
Economic profit (revenue minus all costs)	$2,000

If the owner of the drugstore hired a manager for $17 an hour to take his place, how much of a change would show up in profits?

Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.

(a) Change in accounting profits per month?

$

(b) Change in economic profits per month?

$

Answer 1

Req a: Change in Accounting profits:
Gross revenue				27000
Less:
Cost of goods sold				17000
Wages				2500
Rent and utilities				800
Taxes				700
managers salary (300 hours @$17)				5100
Accounting profits				900
Original Accounting profits				6000
Change in Accounting profits (decrease)				-5100
Req B: Change in Economic profits
Gross revenue				27000
Less:
Cost of goods sold				17000
Wages				2500
Rent and utilities				800
Taxes				700
managers salary (300 hours @$17)				5100
Accounting profits				900
Less: Implicit cost:
Return on inventory				1000
Economic profits				-100
Original economic profits				2000
Change in Economic profits (decrease)				-2100