Question

Sonya used to earn $25,000 a year selling real estate, but she now sells greeting cards. The return to entrepreneurship in the greeting cards industry is $14,000 a year. Over the year, Sonya bought $10,000 worth of cards from manufacturers and sold them for $58,000. Sonya rents a shop for $5,000 a year and spends $1,000 on utilities and office expenses. Sonya owns a cash register, which she bought for $2,000 with funds from her savings account. Her bank pays 3 percent a year on savings accounts. At the end of the year, Sonya was offered $1,600 for her cash register. Calculate Sonya’s explicit costs, implicit costs, and economic profit.

Answer 1

Answer:

(1) $16,000

(2) $25,060

(3) $16,940

Explanation:

Soniya's explicit cost:

= cost of cards + rent + utilities and office expenses

= $(10,000 + 5,000 + 1,000)

= $16,000

Implicit cost = opportunity cost - interest forgone

                    = $25,000 + ($2,000 × 0.03)

                    = $25,060

Economic profit = Revenues - Explicit cost - Implicit cost

                           = $58,000 - $16,000 - $25,060

                           = $16,940