Question

Jessica is a young doctor who has just started her own practice. Her previous position paid her $600,000 a year. For her new clinic, she uses a building which she owns and which she has rented in the past for $20,000 per month. Jessica withdrew $800,000 from her time deposits account and invests in her clinic. Otherwise, she can earn $400 as interest income per month. The decoration of her clinic costs her $300,000. Her total revenue from her new clinic is $2,200,000. She pays $350,000 for the annual operating expenses, and she pays $480,000 in wages to her office nurse for the annual. The total value of equipment is $1,500,000. However, Jessica is just told that if she resells all her equipment in the second-handed market at the year end, she will only receive $1,200,000.

Show your all workings and list the expense.

a) What is Jessica’s total explicit cost for running her own clinic?

b) What is accounting profit of Jessica’s clinic?

c) What is the economic profit of Jessica's clinic?

D) Should Jessica continue to operate her own clinic?

Answer 1

We have the following information

Cost and Revenue	Amount in ($)
Explicit Cost
Time Deposit	8,00,000
Decoration	3,00,000
Operating Expenses	3,50,000
Wages to Nurse	4,80,000
Total Explicit Cost	19,30,000
Implicit Cost
Opportunity cost (previous employment)	6,00,000
Opportunity cost (rent per annum)	20,000x12 = 2,40,000
Opportunity cost (Interest per annum)	400x12 = 4,800
Total Implicit Cost	8,44,800
Total Cost (Implicit Cost + Explicit Cost)	27,74,800
Total Revenue	22,00,000
Accounting Profit (Total Revenue – Explicit Cost	2,70,000
Economic Profit (Total Revenue – Total Cost)	-5,74,800

Since, the accounting profit is positive, so Jessica should continue to operate her own clinic.