Question

# Thomas sets up a new coffee shop in a building he owns. He puts \$200,000 of...

Thomas sets up a new coffee shop in a building he owns. He puts \$200,000 of his money into the business. He could have got 8% interest on this money if he had deposited it in an investment account. He gives up his job, which paid him \$50,000 a year. He could rent the building out for \$10,000 a year.

His business incurs explicit costs of \$80,000 (excluding any salary for himself).

Based on the information above, choose the correct answer for each of the following questions.

 What is his economic profit if revenues are \$180,000? His revenues are \$80,000 in year 1. What is his economic profit?

Answer : Calculation of Implicit cost:

Interest foregone on investment amount = \$2,00,000×0.08 = \$16000

Salary received by Mr Thomas = \$50,000

Rent of the Building = \$10,000

Total Implicit Cost = \$76000

Explicit cost =\$80,000

A. When revenue earned = \$180000

Economic profit = Revenue - (Explicit cost+Implicit cost)

Economic profit = \$180000-(80000+76000) = \$24000

B . When revenue is \$80,000

Economic profit = Revenue - ( Explicit+ Implicit)

Economic profit = \$80000-(80000+76000)

Economic profit = -\$76000

Now Mr Thomas earns a loss of \$76000.

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