Jane owns her own business and is doing an economic analysis of her business for
ID: 1190858 • Letter: J
Question
Jane owns her own business and is doing an economic analysis of her business for the year 2008. She generated $700,000 revenue through the year. The cost of goods sold was $200,000. Jane maintains a $100,000 inventory. Utilities and other like expenses were $25,000. Jane owns the building that her business is in. She could rent her building for $30,000 per year if she didn’t use it. She inherited the building from her parents, so she has no intentions of selling it. Suppose the value of the building at the beginning of the year was $250,000. At the end of the year it was worth $260,000. Around the beginning of 2008 Jane was offered $80,000 to come to work for an acquaintance in another business. Jane feels this is as much as she could get if she weren’t in business for herself. Jane paid out $160,000 for employees. The sum of all other out-of-pocket expenses totaled $140,000. Five years ago Jane purchased a bunch of equipment for her business. It cost her $220,000 then. At the beginning of 2008 the equipment had a market value of $150,000. At the end of the year it was worth $130,000. Assume Jane could have earned 5 percent on the money she had tied up in her business. There would have to be $142,500 in Jane’s pocket after all is said and done, so-to-speak, for Jane to have realized a zero economic profit. The economic profit Jane actually ends up earning is $32,500.
I understand the answer is True. with the following explaination.
Economic Profit of an entrepreneur also takes into account the opportunity cost of the factors employed for earning the profit. Jane has used her own building premises for carrying out the business activities. These premises could have been rented and thus the rent for such premises becomes the opportunity cost.
I would like to know if Jane does actually end up with earning $32,500? Also, can you show how this problem is achieved?
Explanation / Answer
Jane owns her own business and is doing an economic analysis of her business for
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