Question

Decision Making by Individuals and Firms-End of Chapter Problem 2. You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store? O Your economic profit is positive, but your accounting costs are negative. O Your implicit costs are greater than your explicit costs. O Your economic profit is too low to cover all of your costs. Your revenues are insufficient to cover your accounting costs.

Answer 1

Your economic profit is too low to cover all of your costs.

Accounting profit= 200000 - 100000 - 20000= 80000

Economic profit= 80000 - 40000 - 50000= -10000

Economic profit is not enough to cover for all costs.