Question

Jack quit his job at Canadian Tire where he earned $28,000 a year. He cashed in $30,000 of corporate bonds that were paying him 10% annual interest. He used the proceeds to buy a mini-bus. Jack decided to buy the mini-bus in order to set up a commuter service between Delta and Vancouver. There are 200 people who will pay $800 a year for this commuter service. Out of the $800, $650 from each person goes to cover expenses such as: gas, maintenance, insurance and depreciation. A. What are Jack’s total revenues? B. What are Jack’s explicit costs? C. What is Jack’s accounting profit? D. List two important implicit costs that Jack has not included. E. What is Jack’s pure economic profit (loss)? What actions should Jack take based on his pure economic profit (loss)? F. What self-owned economic resource is not included in this question?

Answer 1

A. What are Jack’s total revenues?

Total Revenue = 200*$800 = $160,000 (200 people and per person $800)

B. What are Jack’s explicit costs?

This is the cost paid to the outsiders.

Total Explicit Cost = 200*$650 = $130,000 (200 people and per person $650)

C. What is Jack’s accounting profit?

Accounting Profit = Total revenue – Total Explicit cost

$160,000 - $130,000 = $30,000

D. List two important implicit costs that Jack has not included.

a. The benefit of his own services

b. The benefit of his own investment (interest on corporate bonds)

E. What is Jack’s pure economic profit (loss)?

Economic Profit = Accounting Profit – Implicit Cost

Economic Profit = $30,000 – (28,000 + 10% of 30,000) = -$1000 (Economic Loss)

What actions should Jack take based on his pure economic profit (loss)?

On the basis of the above calculations Jack should not leave the job and start his own business. He is not getting any economic profit because he is not able to recover all his implicit cost.