Question

Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She then develops two possible entrepreneurial business opportunities. In one, she will quit her job to start an organic soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000 and costs for the necessary land, labor, and capital of $435,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,200,000 per year as compared to revenues of $3,275,000 per year.

Answer 1

In one, she will quit her job to start an organic soap company For the soap-making opportunity, she anticipates annual revenue of $465,000 and costs for the necessary land, labor, and capital of $435,000 per year. Total Revenue –             $465,000 Less Accounting Cost –    $435,000 Accounting Profit -          $ 30,000 Less Implicit cost –          $ 50,000 Economic Loss               $(-20,000) It produces economic loss

In the other, she will try to develop an Internet-based competitor to the local cable company For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,200,000 per year as compared to revenues of $3,275,000 per year. Total Revenue –             $3,275,000 Less Accounting Cost –    $3,200,000 Accounting Profit -          $     75,000 Less Implicit cost –          $   50,000 Economic Profit               $    25,000 It produces economic profit

Natasha currently makes $50,000 per year working as a manager at a cable TV company. If she is quitting the job and undertakes any one of the above projects, then $50,000 will be considered as implicit cost.

From the above calculations we can say that Natasha should go for Internet-based competitor to the local cable company because in this project she is earning economic profits.