William Howe must decide whether to start a business renting beach umbrellas at

Question

William Howe must decide whether to start a business renting beach umbrellas at an ocean resort during June, July, and August of next summer. He believes he can rent each umbrella to vacationers at $5 a day, and he intends to lease 50 umbrellas for the three-month period for $3,000. To operate this business, he does not have to hire anyone (but himself), and he has no expenses other than the leasing costs and a fee of $3,000 per month to rent the business location. Howe is a college student, and if he did not operate this business, he could earn $4,000 for the three-month period doing construction work.
(a) If there are 80 days during the summer when beach umbrellas are demanded and Howe rents all 50 of his umbrellas on each of these days, what will be his accounting profit for the summer?
(b) What will be his economic profit for the summer?

Explanation / Answer

a) accounting profit of Howe = Total revenue earned by renting umbrella- total cost incurred

= 5*50*80-3000-3000*3

= $8000

b)

if howe work outside he could earn = $4000

Economic Profit of Howe = 8000-4000 = $4000

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