Question

Mrs. Carol is a British business owner. She has a hair salon located in London. Her salon had revenues of GBP 150,000 in 2019. According to her records, she spent GBP 60,000 on supplies (hair coloring, conditioner, shampoo, and other chemicals, etc.), GBP 50,000 on equipment (chairs, curling irons, mirrors, scissors, etc.) and GBP 10,000 on utilities. She also realized that she could have earned GBP 50,000 working at another salon in 2019.

(c) Evaluate Mrs. Carol's decision to run her own salon in 2019!

Answer 1

Ans:   Mrs. Carol's will not  run her own salon in 2019 becuase her accounting profit is less than her opportunity cost to run the salon in 2019.

Explanation:

Accounting profit = Total Revenue - Total Explicit cost

=  GBP 150,000 - ( GBP 60,000 + GBP 50,000 + GBP 10,000 )

=  GBP 150,000 - GBP 120,000

=  GBP 30,000

Her opportunity cost = Total earning from working at another salon in 2019 = GBP 50,000

In the above scenario , Mrs. Carol's accounting profit ( GBP 30,000 ) is less than her opportunity cost ( GBP 50,000) to run the salon in 2019.

Economic profit = Accounting Profit - Implicit cost or  Opportunity cost

=  GBP 30,000 - GBP 50,000

= - GBP 20,000