Question

After graduating from college, your friend Marie quitted her job as a company junior accountant earning $30,000 annually to start her own video rental business. She inherited a piece of commercial real estate bringing in $10,000 in rent annually from her parents which she converted into video rental store. At the end of the first year, her books showed total revenues of $60,000 and total costs of $30,000 for video purchases, utilities, taxes, and supplies.

Evaluate your friend's decision to quit her day time job to own and run a video rental business.

Answer 1

She should run a business If economic profit of a business is greater than 0.

Economic Profit = Total revenue - Explicit cost - Implicit cost.

Total revenue = 60,000.

Explicit cost is the cost she directly incurs to run a business(like utilities, supplies, etc)

=> Explicit Cost = 30,000

Implicit Cost is the income she sacrifices in order to start a business.

Income she sacrifices = Rent she was receiving + salary from a Job = 30,000 + 10,000 = 40,000.

Hence, Economic Profit = Total revenue - Explicit cost - Implicit cost

= 60,000 - 30,000 - 40,000 = -10,000

Hence, Economic profit = -10,000 < 0. hence, She should not quit the job.

Hence, I will suggest her that she should not quit the Job because Income that she will receive when she do a Job(30000 + 10,000 = 40,000) is greater than income she receives if she starts a business(60,000 - 30,000 = 30,000))(Economic Profit from running a Business < 0)