Question

Ferdinand quits his job as an airline pilot and opens his own pilot training school. He was earning $70,000 as a pilot. He withdraws $10,000 from his savings where he was earning 3 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $6,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $5,000, pays $1,200 for fuel and maintenance, and hires one worker for $30,000. Ferdinand's total revenue from pilot training classes this year equaled $120,000. Ferdinand's economic profit (or loss) this year equals $_________________.

Answer 1

Explicit costs: (Out-of-pocket expenses or the expenses actually incurred in cash)

Rent paid for computer = $1,200

Cost of office supplies = $500

Rent paid for airplane = $5,000

Cost of fuel and maintenance = $1,200

Cost of hiring a worker = $30,000

Annual explicit costs = $1,200 + $500 + $5,000 + $1,200 + $30,000 = $37,900

Implicit costs: (The opportunity costs of the factors of production)

Foregone salary = $70,000

Foregone interest on savings = 3% of $10,000 = 0.03 * $10,000 = $300

Foregone rent from the building = $6,000

Annual implicit costs = $70,000 + $300 + $6,000 = $76,300

Annual economic costs = Annual explicit costs + Annual implicit costs = $37,900 + $76,300 = $114,200

Total revenue from pilot training classes = $120,000

Economic profit = Total revenue - Economic costs = $120,000 - $114,200 = $5,800

Ans: $5,800