Question

10. You friend Kei is thinking of opening an art studio. They estimate it will cost $60,000 a year to rent a space downtown. Additionally, they estimate they will spend $80,000 in merchandise each year. Currently, they are earning $40,000 a year working at a museum. (3 pts.)

a. If Kei thinks they will earn $200,000 a year in revenue, should they open the art studio? Briefly explain your answer.

b. If Kei thinks they will earn $120,000 a year in revenue, should they open the art studio? Briefly explain your answer.

c. If Kei thinks they will earn $160,000 a year in revenue, should they open the art studio? Briefly explain your answer.

Answer 1

10. The studio is expected to cost $60,000 a year for renting a space and $80,000 in merchandise each year. Currently, they are earning $40,000 a year working at a museum. This amount represents the lost earnings of implicit cost in case store is opened and she gives up the museum job

a. If Kei thinks they will earn $200,000 a year in revenue, they will face an economic cost of 60,000 + 80,000 + 40,000 = 180,000. This gives a profit of 200,000 - 180,000 = $20,000. Since economic profit is positive, they should open the studio.

b. If Kei thinks they will earn $120,000 a year in revenue, they will face an economic cost of 180,000. This gives a profit of 120,000 - 180,000 = -$60,000. Since economic profit is negative, they should not open the studio.

c. If Kei thinks they will earn $160,000 a year in revenue, they will face an economic cost of 180,000. This gives a profit of 160,000 - 180,000 = -$20,000. Since economic profit is negative, they should not open the studio.