Refer to the table below. The table shows the monthly economic profit of a drugs

Question

Refer to the table below. The table shows the monthly economic profit of a drugstore.

$21,000

$4,000

If the owner of the drugstore hired a manager for $15 an hour to take his place, how much of a change would show up in:

Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.

(a) Accounting profits per month?

$

(b) Economic profits per month?

$

Total (gross) revenues per month $ 27,000 less explicit costs:   Cost of merchandise sold $17,000   Wages to cashier, stock, and delivery help 2,500    Rent and utilities 800    Taxes 700        Total explicit costs

$21,000

Accounting profit (revenue minus explicit costs) $6,000 less implicit costs:    Wages of owner-manager, 300 hours @ $10 per hour $3,000    Return on inventory, 10% per year on $120,000 1,000        Total implicit costs

$4,000

Economic profit (revenue minus all costs) $2,000

Explanation / Answer

ANSWER:

A) Accounting profit per month will change by $4,500 ( no of hours * wage per hour = 300 * $15 = $4,500) as hiring a manger would account into explicit costs and accounting profit would come down from $6,000 - $4,500 = $1,500

B) Economic profit = accounting profit - implicit costs = $1,500 - $1,000 ( return on inventory) = $500

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