John Jones owns and manages a café in Collegetown whose annual revenue is $5,000

Question

John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Amount $2,00 Expense ood and drink ehicle lease nterest on loan for equipment a) Suppose John could earn $1,100 per year as a recycler of aluminum cans. However, he prefers to run the café and is willing to pay $275 per year to run the café rather than to recycle Is the café making an economic profit? No Should John stay in the café business? No, he should not stay in the café business.+ b) Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of his own money in equipment. Calculate John's annual accounting profit. S c) Suppose John could earn $1,000 a year as a recycler, and he likes recycling just as well as running the café. How much additional revenue would the café have to collect each year to earn a normal profit? $ , the café is making an economic loss # of per year.

Explanation / Answer

a) Economic cost = Labor cost+expenditure on food and drink+Electricity bill+vehicle lease+Rent+interest on loan for equipment+Income foregone as aluminium recyler +275

Economic cost =2000+500+100+150+500+1000+1100+275

Economic Cost = 5625

Economi Profit = Revenue - Economic cost

Economic Profit = 5000-5625 = - $625. Since profit is negative therefore Loss.

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