Question

# Ferdinand quits his job as an airline pilot and opens his own pilot training school. He...

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 \$_________________.

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

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