Question

Carlos Suarez has his own vegetarian restaurant called “Flaco’s Furbys”. In a one-year period of time Carlos pays his food vendors $3,000,000, his beverage vendors $750,000, his workers $4,000,000, the IRS $200,000, his utility providers $80,000, and his insurance company $10,000. He invested $300,000 of his own financial capital in the restaurant, $180,000 of this is recoverable and his broker told him that he would make an 8% return on it in the Brazilian stock market. The centerpiece of the restaurant is a display of Carlos’s huge collection of McDonald’s Happy Meal Furbys. He spent $5,000 amassing the collection, based on recent eBay sales the collection is now worth $18,000.   He sells 100,000 covers at $150.00 per unit; in addition, he does a roaring trade in cocktails selling 200,000 at $10.00 per unit. He was recently offered a job as a lobbyist by PETA (to lobby for a federal bill to ban foie gras production), PETA offered him a $120,000 annual salary. Which of the following is the economic profit for “Flaco’s Furbys”?

a. $8,636,220.

b. $10,000,040.

c. $8,000,040.

d. $8,838,600.

Answer 1

Here,

Payment to Food Vendors = $3,000,000

Payment to beverage vendors = $750,000

PAyment to Workers = $4,000,000

Payment to IRS = $200,000

Payment to Utility Providers = $80,000

Payment to Insurance Company = $10,000

Opportunity Cost of Capital = 8%* 180000 = 14400 (since 180000 is recoverable)

Revenue due to covers = 100,000 covers at $150 = $15,000,000

Revenue due to cocktails = 200000 at $10 = $2,000,000

Opportunity cost due to job = $120,000

Profit due to happy meal furbys collection = $13000

So his economic profit = 15000000 + 2000000 - 3000000 - 750000 - 4000000 - 200000 - 80000 - 10000 - 14400 - 120000 + 13000= 8838600