Question

Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's economic profit is equal to Answer

I debating between 200,000 and 250,000 yearly

Please provide detail

Answer 1

revenue = $600000

economic profit = Revenue - cost( including the imputed cost)

cost ( including the imputed cost) = cost of purchasing good + salary of four employees+ imputed rent of own shop used by sheila + imputed cost of sheila's mananging the business by scarificing other opportunities

cost( including the imputed cost) = 230000 + (25000*4) + 20000+ 45000= 395000

economic profit = Revenue - cost( including the imputed cost) = 600000- 395000= 205000

note: i am assuming that sheila has equal probability to go for job of swimming coach and construction worker

so that's why i have taken average of two opportunities to find imputed cost of sheila's mananging the business by scarificing other opportunities.

imputed cost of sheila's mananging the business by scarificing other opportunities = (1/2)50000+ (1/2) 40000 = 45000