1. (18 points) Heidi quit her job as a chef making $40,000 per year to start her
ID: 1133015 • Letter: 1
Question
1. (18 points) Heidi quit her job as a chef making $40,000 per year to start her own . The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess, $20,000 per year to buy food, etc. (e) (4 points) What is Heidi's monetary profit for the year? (Note: Monetary Profit Total Revenue (b) (4 points) What is Heidi's opportunity cost of owning a restaurant? (Note: Opportunity costs include both monetary costs as well as implieit costs.) c) (4 ponts what i Heidi's economic profit for the year?(Note: Economic Profit-Total F venue Opportunity Costs) (6 points) Based on information giveu above what would you recommend to Heidi, - remain a business woman or go back to her job:" For simplicity, you can assume that Heidi's revemes and costs will not change over the yearsExplanation / Answer
Answer 1
a)
Monetory Profit = Total Revenue - total Monetary cost
total Monetary cost = Total wages + total food cost = 50000 + 20000 = 70000
Total Revenue = 100000
Hence Heidi's Monetary Profit = 100,000 - 70,000 = $30,000.
b)
Heidi's opportunity cost = total monetary cost (as discussed above) + implicit cost.
In this case case implicit cost is the wage he could earn If instead of ownig a a restaurant he was working as a chef. Hence implicit cost = 40,000.
So Heidi Opportunity cost of owning a restaurant = 70,000 + 40,000 = $110,000.
c)
Economic Profit = Total revenue - Opportunity cost = 100,000 - 110,000 = -$10,000. Hence Heidi's is incurring Economic Loss of $10,000.
d)
Assuming total Revenue and cost are same, we discussed in part (c) that if she own a restaurant, she will incur economic loss of -10,000. This means that instead of owning a restraurant she should get back to her old Job.
Based on the information above I would recommend her to go back to her old job.
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