Question

1. A firm sells 150 units of output at a price of $8 each. The economic cost of producing the 150 units of output is $1,000. Calculate the firm's level of economic profit.

2. Claire's Cafe hires you to determine the business's status. The data below provides information on the company's annual costs and revenues. Wages $85,000 Interest paid on loans 7,000 Other expenditures for factors of production 67,000 Total Revenue 250,000 Claire spends at least 40 hours a week at her place of business. If she closed the cafe, she could work for her competitor and earn $30,000 per year. See also owns the building that houses the cafe and could rent it out for $24,000 per year if he closes his business. Calculate the economic cost and economic profit for Claire's Cafe.

Answer 1

Q1. Economic profit = $200

Economic profit =

Total Revenue - Total economic cost

Total revenue = output*price = 150*$8 = $1200

Total economic cost of 150 units is given as $1000.

So, economic profit = $1200-$1000 = $200.

Q2. Economic cost = $213,000.

Economic profit = $37,000.

Economic cost includes all the implicit and explicit costs borne.

Here, explicit costs are direct costs and implicit costs are opportunity cost of doing business. That is the opportunities of earning given up to do the business.

Economic profit is ghe the difference between total revenue and total economic cost.

Explicit costs wages - $85,000 Interest paid = $7,000 Other expenditerres = $67,000 Total explicit costs = $85000 + $7000 + $67,000 = $159,000 Implicit costs: Salary given up = $30,000 Rent given up = $24,000 Total implicit costs = $30,000 + $24,000 = $54,000 Total economic cost = Total explicit cost + Total implicit cost = $159,000 + $54,000 - $213,000 Revenues - $250,000 Econonuc profit = Total Revenue - Total econonic cost = $259000 - $213,000 = $37,000 Therefore, and Economic profit = $37,000 Economic cost = $213,000