Question

Read the situation below and complete the following tasks:

• Post your own reply to the eight questions = show your work for questions 6 through 8

After working as a head chef for years, Jared decided to open up his own restaurant.

Label each item as either a explicit cost or implicit costs (HINT: remember an implicit costs would mean there would have to be an opportunity cost)

1. _________________He gave up his yearly $60,000 salary to open his own restaurant last year.
2. __________________He withdrew $50,000 of his own savings that had been earning $2,000 in interest per year.
3. __________________He borrowed $100,000 from the bank at a rate of 5% per year.
4. __________________The restaurant space he was leasing had no separate office. Jared converted his basement apartment into office space. He had previously rented the apartment to a student for $300/month totaling $3,600 per year.
5. __________________Jared values his entrepreneurial skill at $10,000 annually to run a similar type if business if he had not elected to open his own restaurant.

The table summarizes his operations for the past year.

Total sales revenue	$590,000
Employee wages	$120,000
Materials	$350,000
Interest on loan	$5,000
Utilities	$10,000
Rent	$25,000
Total explicit costs	$510,000

6. What is Jared's accounting profit?

7. Find Jared's total implicit costs.

8. What was Jared's economic profit last year?

Answer 1

Explicit cost is the cost that is directly related while the implicit cost is the implied cost and it includes the opportunity cost which the benefits forfeited for choosing the next best option.

Explicit Cost
1) He borrowed $100,000 from the bank at a rate of 5% per year.

Implicit Cost
1) He gave up his yearly $60,000 salary to open his own restaurant last year.
2) He withdrew $50,000 of his own savings that had been earning $2,000 in interest per year.
3) Jared converted his basement apartment into office space. He had previously rented the apartment to a student for $300/month totaling $3,600 per year.
4) Jared values his entrepreneurial skill at $10,000 annually to run a similar type if the business if he had not elected to open his own restaurant.

Accounting Profit = Total Revenue - Total Explicit Cost
590000 - 510000 = 80000

Total Implicit Cost
60000 + 2000 + 3600 + 10000 = 75600

Economic Profit = Total Revenue - ( Total Explicit Cost + Total Implicit Cost )
590000 - ( 510000 + 75600 )
= 4400