Question

-----A business owner makes 1000 items a day. Each day she spends 8 hours producing those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her economic profit? a. ?$240,000 b. ?$60,000 c. ?$300,000 d. ?$450,000 ----------------------------------------------------------------------------------------------

Answer 1

Economic profit = Total revenue - ( Explicit cost + Implicit cost)

• Implicit costs are the opportunity costs, or next best alternative. In other words, it is the cost which we have to sacrifice in order to do some other thing. For example - in this question, the business owner sacrifice a job where she can earn $250 per hour. In this question she work for 8 hours so if she decide to choose the job she could earn $250 * 8 = $2000 per day and she can earn $2000 * 30 =$60000 in a month which she have to sacrifice for her own business. So implicit cost is $60000.
• Explicit cost are the direct payments made to the others or the cash outflow. Here it is given that explicit cost is $150000 per month.
• Total revenue = price * quantity of output, in this question the item sells for $15 I.e., price = $15 and quantity of output is 1000 items a day means in a month 1000*30 = 30000 units of output.

Total revenue (TR) = price * quantity of output

TR = 15 * 30000

TR = 450000

Now we have all the values so we put these values of implicit cost, explicit cost and total revenue in the economic profit

Economic profit = TR - ( implicit cost + explicit cost)

Economic profit = $450000 - ( $60000 + $150000)

Economic profit = $ 240,000.

So correct ans is a) 240,000.

Option b) is incorrect because $60,000 is implicit cost not economic profit.

Option c) is also incorrect because the value of the economic profit is $240000 not $300000

Option d) is also incorrect because $450000 is the total revenue not the economic profit.