Question

Jeremy worked at a bank with a monthly salary of $1,500. He decided to quit his job and open a bookstore in his neighborhood. He now pays $500 in rent, $80 in utilities, and $120 in wages every month.
a.   Suppose Jeremy sells 100 books at the price of $30 every month.
i.   What is the monthly total revenue of Jeremy’s bookstore?
ii.   How much accounting profit does Jeremy make every month?
iii.   How much economic profit does Jeremy make every month?
b.   If Jeremy had not quit his job at the bank, he could have been promoted and got a pay raise of 30 percent.
i.   Will there be any changes in the monthly explicit and implicit costs of Jeremy’s bookstore?
ii.   Will there be any changes in the accounting profits of Jeremy’s bookstore?
iii.   Will there be any changes in the economic profits of Jeremy’s bookstore?

Answer 1

a)

i) Total Revenue = Price*Quantity = 100*30 = $3000

=> Total Revenue Of Book Store = $3000

ii) Accounting Profit = Total Revenue - Explicit Cost

Explicit Cost is the Total cost incurred for running the business like (Cost on Rent wages and other factors of Production)

Hence Here Explicit Cost = Rent + Utilities + Wages = 500 + 80 + 120 = $700

=> Accounting Profit = Total Revenue - Explicit Cost = 3000 - 700 = $2300

Hence, Accounting Profit = $2300

iii) Economic Profit = Total Revenue - Explicit Cost - Implicit Cost

Implicit Cost is the Amount he sacrificed in order to start the New Business.

Hence Implicit Cost = Salary He sacrificed = $1500

Hence:

Economic Profit = Total Revenue - Explicit Cost - Implicit Cost

= 3000 - 700 - 1500 = 800

Hence, Economic Profit = $800

b)

Now, If His salary will Increase Then Everything will be same except Implicit Cost which is Now Equals 1500 + (30/100)*1500 Now, Implicit Cost = 1500 + 450 = $1950.

Hence

i) Total Revenue = Price*Quantity = 100*30 = $3000

=> Total Revenue Of Book Store = $3000

ii) Accounting Profit = Total Revenue - Explicit Cost

Explicit Cost is the Total cost incurred for running the business like (Cost on Rent wages and other factors of Production)

Hence Here Explicit Cost = Rent + Utilities + Wages = 500 + 80 + 120 = $700

=> Accounting Profit = Total Revenue - Explicit Cost = 3000 - 700 = $2300

Hence, Accounting Profit = $2300

iii) Economic Profit = Total Revenue - Explicit Cost - Implicit Cost

As calculated Above , Implicit Cost = $1950

Hence:

Economic Profit = Total Revenue - Explicit Cost - Implicit Cost

= 3000 - 700 - 1950 = $350

Hence, Economic Profit = $350