Question

Suppose you currently have a job as an accountant for a local accounting firm.
You are considering quitting your job and opening up a coffee shop. Given the
following pieces of information, what would your monthly economic profit be
if you started the business?

• You earn $4,000 per month at your accounting job.
• You plan to run the business out of a commercial space that you own on Milwaukee
Avenue that you are currently renting out for $2,000 per month.
• You expect that you can sell 2,000 cups of coffee per month if you price them at $4 each.
• The cost of ingredients (beans, cups, milk, flavoring) is $0.50 per cup
• You would need to invest $10,000 worth of your own savings to start the business.
Assume the monthly interest rate is 10%

Answer 1

Total revenue = $4 * 2,000 = $8,000

Explicit costs = $0.50 * 2,000 = $1,000

Implicit costs = 4,000 + 2,000 + (10,000 * 0.10) = 7,000

Economic profit = Total revenue - Explicit costs - Implicit costs

                          = 8,000 - 1,000 - 7,000

                          = $0

Thus, your monthly economic profit would be $0.