Question

Jack runs an automotive shop. He pays 3 worker $30,000 each per year. He leases his shop for $15,000 per year. He has material costs of $25,000 per year. He pays $3,000 per year for utilities and insurance. He borrows $150,000 at an interest rate of 10 percent and invests $20,000, which could have earned him $2000 per year if alternatively invested, of his own money to invest in the business. He was offered $75,000 per year to work for PepBoys. His total revenue for the first year is $350,000.

(Note: Do not use decimal points or commas. Ex. format for answers is 50000)

a) What is his total explicit cost?

b) What is his total implicit cost?

b) What is his accounting profit?

c) What is his economic profit?

d) What normal profit does he need to earn so that he is doing equally as well with his resources as his next best alternative use for those resources?

Answer 1

Solution:-

(A). Explicit Cost = 3(30,000) + 15000 + 25000 + 3000 + (150,000 * 10/100)

                   = 148,000

(B). Implicit Cost = 2000 + 75000

                           = $ 77000

(C). Accounting Profit = Total Revenue - Total cost (explicit)

= 350,000 - 148000

= $ 202,000

(D). Economic Profit =Total Revenue - Total cost (Explicit + Implicit)

= 350,000 - (148,000 + 77000)

= $ 125,000