A organic food boutique is owned by Pam and has the following statement of reven

Question

A organic food boutique is owned by Pam and has the following statement of revenues and costs: Revenues $250,000 Supplies $25,000 Electricity $6,000 Employee Salaries $75,000 and Pam’s Salary $80,000.

Pam has the option of closing down the shop and renting out the land for $100,000. Also, Pam has a job offer at a local shop at a salary of $95,000. Compute Pam's economic profits, which is the difference between revenues and opportunity cost. Show your work and provide a clear and concise reccomendation to Pam as to what she should do.

Explanation / Answer

Answer:

The economic profit is calculated by deducting explicit cost and opportunity cost (implicit cost) from the total revenue.

Economic profit = revenue – explicit cost –opportunity cost

Revenue = $250,000 + pam’s salary $80,000

Explicit cost = Supplies $25,000 + Electricity $6,000 + Employee Salaries $75,000

Explicit cost = $ 106,000

Opportunity cost = renting out the land for $100,000 + job at local shop at s salary of $95000

Opportunity cost = $1,95,000

Economic profit = $330,000 - $106,000 - $ 1,95,000

                                = $ 29,000

The economic profit is $29,000 as it is positive means there is no loss in this business so Pam should continue the organic food boutique.

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